I have very deep reservations about the stimulus bill now making its way through Congress, which is probably no surprise if you’ve been reading me for a while. I’ll try to avoid the politics and just comment here on the economic theory, the standard macroeconomic models that concern capital and investment flows, government spending and debt and labor supply and unemployment generally treat labor as a commodity. This was fine for the models back in the 30s and even the 70s when the large majority of workers in the US had a high school education or less. Today we have a labor force that is mostly at least partly college educated, but definitely more skilled and more specialized. This means that stimulating demand for labor via government projects will not necessarily provide good employment for those more specialized workers. Also, the government’s successful promotion of home ownership over renting means the workforce is also less geographically mobile, particularly so given people’s reluctance to sell into a down market. All this means that the government’s ability to reduce unemployment via borrowing to do make-work projects is far, far reduced from 70 and 40 years ago when Keynes and Galbraith laid the theoretical foundation for the type of stimulus the government is likely to try. The labor force is neither as interchangeable nor as mobile as it used to be.
My take is that it’s just as likely to make our economic problems worse rather than better, I don’t see increasing borrowing as the right medicine for a country that is overleveraged. I don’t see Congress making investment decisions nearly as efficiently as business managers, though they’ve shown their fallibilty recently. Members of Congress are subject to the same cognitive biases but have even worse incentives and generally lack training or experience in making business investments.
