An economist who lives up to his name

Monty Pelerin
Dr. Alan Blinder, Professor of Economics at Princeton and former vice chairman of the  Federal Reserve Board (among many other prestigious accomplishments), had an editorial on November 16 in the Wall Street Journal entitled "How Washington Can Create Jobs."  The editorial is a typical example of the Keynesian and Statist mentality that most economists have toward job creation.

Dr. Blinder arbitrarily sets a spending budget of $30 billion for new jobs and then explores two different alternatives. First, he suggests hiring 1.0 million new government employees at a cost of $30,000 per hire. Second, he suggests using a "tax credit" for private industry for newly hired employees that would effectively lower the wage costs for new employees by an estimated 10%. He estimates this plan, using econometric estimates based on job elasticity, to create "... about 5.5 million net new jobs ..."

His own figures reveal the economically correct answer as to which alternative to select. The "tax credit" alternative produces 5.5 times as many jobs as the government hiring program. Furthermore, they will be real jobs, rather than mostly make-work jobs. Yet, he chooses the government hiring program, apparently blinded by the ideology that more government is better. His rationale for rejecting the tax incentive plan is that employers would engage in behavior that he describes as "gaming the system." All governmental interventions, including the alternative plan of government hiring of new employees, are plagued by such costs and unintended consequences.

Let's use Dr. Blinder's own numbers to show why his choice appears ideological rather than economic. Accepting his econometrics (simple historical statistical relationships), "a 10% reduction in after-tax wage costs... should boost employment by roughly 4%." Suppose 5.5 million real jobs were produced, but 7.5 million were claimed, or nearly a 40% overstatement. The "gaming costs" would be 2.0 million jobs not actually created. The government would pay $42 billion when it should have paid about $30 billion. This gaming cost is equal to about $12 billion. A similar gaming calculation for the program that Dr. Blinder recommends could also be done. We saw how easy it was to fudge "jobs saved" recently.

Dr. Blinder expressed great concern in the beginning of his editorial for the unemployment problem in this country. Yet he rejects a proposal that he says would create 5.5 million jobs in the private sector for one that would create 1.0 million in the public sector. Yes, the first one costs more but could be monitored along the lines that Dr. Blinder suggests to hold down the "gaming costs." His public sector choice would reduce unemployment from 10.2% to about 9.5%. The rejected public plan would reduce the unemployment rate to 6.2%, per his own numbers.

Either ideology or lack of mathematics seems to be at work here. Dr. Blinder's continued support for minimum wage legislation would suggest that it is ideology. Despite his labor elasticities discussed above, he has consistently supported raising the minimum wage, even though his own data show that it must increase unemployment amongst the poorest segment of society.

Monty Pelerin blogs at  Monty Pelerin's World

Dr. Alan Blinder, Professor of Economics at Princeton and former vice chairman of the  Federal Reserve Board (among many other prestigious accomplishments), had an editorial on November 16 in the Wall Street Journal entitled "How Washington Can Create Jobs."  The editorial is a typical example of the Keynesian and Statist mentality that most economists have toward job creation.

Dr. Blinder arbitrarily sets a spending budget of $30 billion for new jobs and then explores two different alternatives. First, he suggests hiring 1.0 million new government employees at a cost of $30,000 per hire. Second, he suggests using a "tax credit" for private industry for newly hired employees that would effectively lower the wage costs for new employees by an estimated 10%. He estimates this plan, using econometric estimates based on job elasticity, to create "... about 5.5 million net new jobs ..."

His own figures reveal the economically correct answer as to which alternative to select. The "tax credit" alternative produces 5.5 times as many jobs as the government hiring program. Furthermore, they will be real jobs, rather than mostly make-work jobs. Yet, he chooses the government hiring program, apparently blinded by the ideology that more government is better. His rationale for rejecting the tax incentive plan is that employers would engage in behavior that he describes as "gaming the system." All governmental interventions, including the alternative plan of government hiring of new employees, are plagued by such costs and unintended consequences.

Let's use Dr. Blinder's own numbers to show why his choice appears ideological rather than economic. Accepting his econometrics (simple historical statistical relationships), "a 10% reduction in after-tax wage costs... should boost employment by roughly 4%." Suppose 5.5 million real jobs were produced, but 7.5 million were claimed, or nearly a 40% overstatement. The "gaming costs" would be 2.0 million jobs not actually created. The government would pay $42 billion when it should have paid about $30 billion. This gaming cost is equal to about $12 billion. A similar gaming calculation for the program that Dr. Blinder recommends could also be done. We saw how easy it was to fudge "jobs saved" recently.

Dr. Blinder expressed great concern in the beginning of his editorial for the unemployment problem in this country. Yet he rejects a proposal that he says would create 5.5 million jobs in the private sector for one that would create 1.0 million in the public sector. Yes, the first one costs more but could be monitored along the lines that Dr. Blinder suggests to hold down the "gaming costs." His public sector choice would reduce unemployment from 10.2% to about 9.5%. The rejected public plan would reduce the unemployment rate to 6.2%, per his own numbers.

Either ideology or lack of mathematics seems to be at work here. Dr. Blinder's continued support for minimum wage legislation would suggest that it is ideology. Despite his labor elasticities discussed above, he has consistently supported raising the minimum wage, even though his own data show that it must increase unemployment amongst the poorest segment of society.

Monty Pelerin blogs at  Monty Pelerin's World