Politics and Job-Creation Policies – Disagreements and The Theories Behind Them

Blogging time has been in short supply lately.  To compound things, I’ve had a bunch of inter-woven ideas bouncing around in my head that I want to explain, but  I’ve been struggling to figure out how to do it.  I’ve been stuck in the “can’t explain this until I explain that which in turn needs this explained” circle.  Uggh.  So I’m going to just start taking a shot at it and write some posts that all relate one way or other.

What I want to talk about is why there’s so much disagreement among economists about policies, particularly when it comes to macroeconomic policies.

Few people, regardless of political ideology, dispute the idea that the U.S. economy needs to create more jobs.  It’s obvious to nearly all that persistent unemployment rates over 9% and an economy that month after month fails to create enough net new jobs to keep pace with population growth is problem in need of solution. Likewise, few dispute the idea that the solution will rely upon some sort of policy change.  Even the far-right wing, conservative economists and Austrian school economists argue for policy change. Virtually nobody argues that current policies are ideal.  The issue, then, is how to change policy.  In what direction should policy change so that the government can encourage job creation?

Like many things in political economy, there’s a range or spectrum of recommendations.  I personally don’t like the simple “right vs. left-wing” or “conservative vs. liberal progressive”* terminology. I think things are more complex and positions are richer than that.  But, for purposes of exposition here, I’ll go with it today.

If there are n politicians, there are probably at least n+1 different specific proposals of what to do to change policy to encourage job creation.  But today I’m not looking at specific proposals. Today I want to look at patterns, types, or categories of proposals.  I’m interested in the essence of the logic and economic models/ideas behind the proposals, the thinking that leads people to believe they’ll work.

Right now let’s say there are 4 different categories or generalized views, ranging from what might be called extreme right-wing or libertarian views through conservative views through mildly progressive views and finally a more radical or activist progressive view.  Let’s look at each one, the types of policies advocated and some comments on the economic thinking behind them.  I’ll offer my views afterward.

First, let’s take what we can call the far-conservative view or libertarian (economic libertarian, not necessarily social libertarian).  In the U.S. today, this is represented by the Tea Party positions.  The view here is that it’s  government interference with the free market, private property, and private wealth that causes unemployment in the first place.  Therefore, what’s needed, they argue, is for minimal government with minimalist taxes and as little regulation as possible.  They argue that only the private economy creates jobs at all and that the government cannot by it’s nature create any jobs.  Their proposals will typically take the form of calls for tax cuts, government spending cuts, and repeal of regulations. They will oppose any government programs they see as “welfare” or “redistributionist” such as Social Security or Medicare. Their rhetoric will typically include phrases about “unleashing the private sector”.  In terms of economic theory, supporters of this view find support from what we call Austrian-school economists and the more strict Neo-classical macroeconomists (think University of Chicago school).   These schools of macroeconomics in many ways aren’t about macroeconomics at all.  The theories are heavily based on microeconomics, in particular, the models of pure utility-maximizing rational people interacting in unrestricted markets.  Much of this view in macroeconomics has been called rational expectations schoolefficient markets theory and real business cycle theory.

Next is a the conservative view.  Until the last few years, the milder conservative view was what was espoused mostly by Republican candidates such as both Bushes and Reagan.  In more recent years the Republicans (in general) have moved further toward the far-conservative/libertarian view.  The conservative view is likewise grounded in traditional microeconomic-based neoclassical models.  In many ways, the conservative view is very similar in thinking to the far-conservative libertarian.  They both derive their conclusions from a reliance and embrace of pure-utility maximizing rational micro models of markets.  Both will tend to advocate tax cuts, especially for high-income earners and for corporations. The idea is that high-income earners and corporations would normally create enough new jobs but that taxes discourage them from creating jobs by making business and investment look unprofitable.  The assumption is that if you eliminate or reduce the taxes, investment will naturally look profitable and attractive.  Private sector investment spending will then drive growth in the economy.  This view has also been called supply-side economics. The conservative view typically relies upon rational expectations, efficient markets, and real business cycle theory also, but it also takes a lot from the monetarist views of Milton Friedman and his disciples.

The major point of disagreement between regular conservatives and the far-conservative/libertarian views is really in the area of monetary policy.  Far-conservatives or libertarians dislike central banks (seen as government agencies) and often call for a return to some form of commodity-based money such as gold.  The regular conservative view instead believes that an independent central bank, like the U.S. Federal Reserve Bank, if it follows anti-inflation policies, can usually manage monetary policy and interest rates to encourage growth when needed.  In effect, far-conservative/libertarians believe that no type of government or central bank actions can achieve high employment and high growth by policies.  In effect, recessions are simply events we have to live through -they can only be made worse, not better by government policy.  Regular conservative-types favor using monetary policy, in particular interest rates, to manage the economy. And, if monetary policy is ineffective, then they advocate using tax cuts to stimulate the economy.  They have a strong bias against government spending, or at least spending that is used to stimulate the economy (spending for military and wars is usually OK though).

Next we move to views that owe a greater heritage to John Maynard Keynes, though Keynes is far from the only theorist contributing to the views.  We’ll call the next group of policy recommendations Keynesian.  Not surprisingly, this view owes a lot to Keynes.  But Keynesian theory and models have evolved a lot since Keynes’ time.  Some historians of economic thought have argued that, were he alive today, Keynes might not agree with what much of what today’s “Keynesians” argue.  Nonetheless, standard Keynesian models/theories differ from classical/neo-classical/supply-side theories (the ones that conservatives like) in that it focuses on aggregates in the economy like total demand and total spending.  Keynesian models also try to explain why in aggregate, the total economy doesn’t always behave as if it were a simply made of purely rational micro-markets.  Keynesian theory allows for more situations where markets don’t behave rationally all of the time.  Even more significantly, Keynesian theory observes that if we simply assume the economy is the sum of whatever happens in a bunch of micro-markets, we can commit the fallacy of composition.  Keynesian theory points out the cases where the paradox of thrift takes over or when monetary policy is not likely to be effective.

Despite the allegations of many critics, standard Keynesian theory allows for monetary policy to be effective.  But typically standard Keynesian theory says that when the crisis is big or when interest rates are very, very low, then only fiscal policy, increased deficits, will do the job.  Those deficits could be created by either tax cuts or increases in government spending. But, they won’t be equally effective in creating jobs. Basically what’s needed is more spending (demand for goods) in the economy. People need to be motivated to spend more money.  Tax cuts provide money for households and firms to spend, but they do so weakly.  First, people might not spend all the tax cut – they might save some.  Increased savings won’t increase total demand and therefore won’t create the need for new jobs. Further, firms will only spend if they expect future increases in demand.  They won’t spend and invest just because they have more cash in their hands.  Since we have no assurance that a tax cut will result in enough new spending in the economy, Keynesians are more likely to argue for increased government spending because government spending directly creates demand for goods and services.  Contrary to critics’ claims, Keynesian policies are not based upon any ideological desire for socialism or government control.

So what do Keynesian policy proposals for creating more jobs look like?  Increased government spending is the answer.  In particular, while any spending will help, the most desirable forms of spending are public goods, things like infrastructure and schools, and also on social safety nets, things like unemployment compensation, social security, and Medicare. If a proposal calls for more infrastructure spending or extensions/increases in unemployment compensation, it is clearly inspired by theories/models with Keynesian roots.

Finally, there’s proposals that are inspired by the most progressive branches of modern macroeconomics.  Let’s call these proposals the Progressive proposals. Proposals in this area would involve would build upon the ideas of Keynesian group, but go further.  The spending would be greater and on a larger scale. Proposals in this area would call for programs where the government doesn’t just fund projects and buy goods, it actually creates programs that directly hire the unemployed.  Typically such programs are proposed to be temporary or designed in a way to only hire when the private sector won’t (see Bill Mitchell & Randy Wray’s Jobs Guarantee proposals).  These are not socialist or communist proposals.  That’s a whole different thing.  Often Progressive jobs-creation proposals include having the government initiate and fund large-scale infrastructure projects during periods of high unemployment.   This group, which has little popular voice among modern U.S. politicians, is inspired by what’s called Post-Keynesian and Modern Monetary Theories.   In many ways, the original Keynesian proposals for dealing with unemployment are closer to this group than to what we call Keynesian today.  Today’s Keynesians are actually pretty conservative when compared to historical policies.

So there we have it.  Four schools of thought and proposals for how to create jobs in the economy.

Despite the labels attached and misused by politicians, the reality is that the political discussion and policy recommendations of today, the ones with supporters in Congress or the White House, are actually quite conservative.  Franklin Roosevelt and the New Deal in the 1930’s was actually rather Progressive.  In the 1950’s, 60’s, and 70’s, the dominant thinking in Washington was Keynesian.  In fact  a”centrist” politically in that era would have still been somewhat Keynesian on our scale above.  In the 1980’s though today, the “center” of mainstream politics has increasingly moved towards conservative thinking.  Today, for example, President Obama is actually pretty conservative.  He is certainly more conservative than the Republican Richard Nixon was in the 1970’s.

Let’s look at the latest proposal from the Obama administration for stimulating the economy to create jobs. It’s actually quite conservative and it’s not very Keynesian at all.  In fact, of the proposed $447 billion effort, less than 1/4 involves more spending for infrastructure or unemployment benefits.  That’s less than 1/4 of the proposal is basic Keynesian.  Instead, it’s overwhelmingly focused on tax cuts and business tax credits/incentives.  These are the policy proposals of a conservative.  Even the original 2009 “stimulus bill” was heavily oriented towards tax cuts and tax incentives.  Despite what critics said, less than half of it was traditional Keynesian stimulus. It’s a sign of how the U.S. political dialogue has shifted towards the conservative/far-conservative end that the Obama proposals have been challenged as “Keynesian” and Obama himself accused of being “socialist”.

* The word “liberal” is particularly problematic. The positions argued by today’s “conservatives” in the U.S. are in fact the positions that were historically identified as “liberal” going back to the 1800’s.  In the 1800’s “liberal” meant anti-government and pro-free market.  Yet, thanks to the power of talk radio and Republican presidential campaigns since the 1980’s, the word liberal has come to be used an epithet to describe opponents of conservatism.  I’ll stick with progressive to label this more left-wing end of the political spectrum to avoid the emotional taint that liberal carries these days.

8 thoughts on “Politics and Job-Creation Policies – Disagreements and The Theories Behind Them

  1. Pingback: Politics and Job-Creation Policies – Disagreements and The … | All Tech Downloads

  2. Great post, Jim!

    Far too many US econ profs teach a curriculum that completely Mises the point. Glad to see Lansing has better to offer!

  3. This is a very well-done explanation of the major categories of economist’s ideas/positions in these days; thanks.

  4. Pingback: Businesses (and Micro) Refute the Logic of Jobs Tax Credits « EconProph

  5. When your strip away all the titles; all economic activity starts with a human mind that has the ability to build something and sell it (and that includes services too). This mind needs aptitude and a lot of attitude, and motivation to accomplish it’s goal (rare combination of talents) Inspite of new technology to simplify our lives, the mental barriers to creating new commerce is becoming more and more complicated. …from my experience at a fortune 50 company, I see more unnecessary process and controls being added daily. Lawyers and government (sox controls) are getting more and more involved, and this all makes the process of work more complicated and less productive.

    We need a hybrid model that simplifies commerce but has a strong public sector to fill the niches that that private sector can’t; and it all get’s funded using MMT principles.

  6. Pingback: Yep, This Is What A Liquidity Trap Looks Like « EconProph

  7. Pingback: Is The Fed Corrupt or Out of Control? « EconProph

  8. Excellent distillation of ther major economic schools of thought today. So even-handed that I could barely tell which one you espoused.
    Great job.

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