Saturday, August 11, 2012

Evan Soltas goes too far in criticizing full employment goals

He writes:

"President Barack Obama and presumptive Republican nominee Mitt Romney seem to agree on something: the primary policy goal of the federal government should be increasing the level of employment. Obama would seek to achieve this goal through fiscal policy; Romney thinks the private sector can lead a fuller recovery if only the government would get out of the way.

Obama and Romney, however, are both wrong. Increasing the level of employment is an inappropriate policy goal for the federal government. Instead, policymakers should aim for a sustained increase in the level and rate of growth of productivity, real output, and living standards...

Milton Friedman long ago crystallized this point when he asked a pointed question during a visit to a canal-building project. The government representative overseeing the work told Friedman they were not using earth-moving equipment because it was meant as a jobs program. Friedman responded: "Oh, I thought you were trying to build a canal. If it's jobs you want, then you should give these workers spoons, not shovels."

Public policy should not aim to make work. Making work is easy if one accepts the trade-off with productivity. Rather, the proper goal for public policy should be, in essence, to create jobs worth working or to create the conditions under which such jobs will be created."

This seems wrong to me, and I don't think a snarky Friedman anecdote makes it right. An important task of the federal government is to maintain full employment: to "create jobs". This tells you nothing about how they should create jobs, of course. Should they create jobs in a way that wastes taxpayers money and scarce resources?

No, that's dumb. It's going to destroy jobs in the private sector if federal work is done less productively than it could be. It will waste labor and it will waste capital. The problem with the canal project was not that it was intended to create jobs. The problem with it was that by doing inefficient work it unexcusably drew resources away from more valuable work, destroying other jobs that could have been done.

The correct approach would have been to use earth-moving equipment and then build a second or a third or a fourth canal (and employ earth-moving equipment makers in the process)!

Now, Evan's response to that may be "I agree with that - jobs are great if we don't sacrifice real output, productivity, etc. to get them". But then I'd have to ask him why he was under the impression Obama or Romney or anyone else ever thought differently. I'm not a big fan of Romney, but I give him more credit than that!

There is a real trade-off between productivity, real output, and employment. For one thing there's a simple inter-temporal trade-off. Increase real output today may cost real output tomorrow. But there's also instances where we'd prefer job creation to real output growth, and you don't need the outrageous claims of that canal builder to get there. Most Americans access the benefits a market economy has to offer through employment income. If you're not employed your access to those benefits is severely curtailed. Secular real output growth as a result of productivity has been by far and away the greatest anti-poverty program. But insofar as labor market troubles keep people from accessing that there is a potential trade-off to consider.


  1. I would put it more simply and ask him how does one improve the productivity of the unemployed.

  2. Soltas: "President Barack Obama and presumptive Republican nominee Mitt Romney seem to agree on something: the primary policy goal of the federal government should be increasing the level of employment. "


    If Obama thought that that was a primary goal, he would have made more of an effort to increase employment. Instead, he takes pride in reducing gov't employment.

    And Romney likes to fire people. Besides, there is no reason to think that he would not be in thrall to a Republican Congress in regard to jobs. High unemployment is an opportunity for Republicans to push anti-labor policies.

    Neither candidate has presented anything like a real plan to increase employment, something with means, goals, and deadlines.

  3. I have to agree with your position, Daniel. Even though Evan Soltas writes well, he was wrong in this instance.

  4. I don't know: I think there's something to the Soltas/Friedman point here. I'm thinking of: 1) Malthus's defense of landlord expenditures on "unproductive labor" as bolstering effective demand when investment lags behind savings; 2) Keynes's rhetorical use of pyramids and money-burying to illustrate his point about supporting aggregate demand in a depression; 3) Ricardo's addition of the chapter "On Machinery," in which he allows that the introduction of labor-saving machines may increase short-run unemployment, and argues that adoption of more efficient methods should be limited.

    The rub is as Soltas and Friedman suggest: the goal of maximizing productivity and the goal of maximizing employment are not necessarily aligned. We can object -- as Daniel does here, and as Keynes did after making his rhetorical point -- that there is no need to push employment into useless and inefficient projects. But it may really be the case that we will face quickly diminishing returns in finding suitable public works projects. In this case, some may say (as Kalecki did) that it is better to support demand through transfer payments. But is a transfer payment really equivalent to a pay check? I say no. Having a job makes a person feel useful, and having more people working is good for social morale.

  5. Daniel,

    Thanks for the feedback. Here's why, I think, you and I don't see eye-to-eye here.

    I think it is the exclusive responsibility of monetary policy to manage aggregate demand, doing so by stabilizing nominal income. Beyond the provision of public goods and the provision of social insurance/a "minimum opportunity standard," I think public spending -- and maybe even public policy, period, but don't hold me to this in case I'm forgetting something -- doesn't accomplish anything of use unless it increases aggregate supply or increases the rate of AS growth.

    You make a comment at the very end of your post which implies that unemployment affects AS growth for the unemployed. I agree; I've made similar points on my blog in the past which argue that our measures of productivity are flawed because they don't include the productivity of the unemployed, just the productivity of employed persons. ( The obvious response to this is to say that public policy should aim to increase AS under conditions of full employment as maintained by the central bank.

    Daniel, what would be your indifference curve between GDP growth and declines in the unemployment rate? You seem to imply that you are willing to trade off between the two. I don't think it's worth it in the long run at any margin. Declines in the unemployment rate w/o rising GDP mean declines in AS, which to me is unambiguously and always a bad thing.


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