Not Your Grandfather's (or Keynes’s) Economy
Saturday, November 7, 2009
We are currently hearing a lot about Keynesian economics. A number of economists and pundits suggest that his theories, developed in the 1930s, provide us with the best guide to economic policy today.
This back-to-Keynes movement ignores the dramatic restructuring of our economy over the past 50 years.
Consider three changes.
1. The decline in manufacturing production workers as a percent of employment.
2. The increase in the proportion of the work force with at least some college education.
3. Proportion of unemployed not on temporary layoff, at peak during a recession.
From the 1950s through the 1970s, unemployment during recessions was typified by manufacturing production workers with no more than a high school education on temporary layoff. That is no longer the case. The proportion of manufacturing production workers in the economy has shrunk to less than 7 percent. Relative to this secular drop in assembly-line work, cyclical variations have lost their significance.
Statistics on the educational composition of the labor force tell us that the textbook notion of homogeneous unskilled “labor” does not describe today's workers. Over the last 50 years, the proportion with at least some college education has soared from 17 percent to 61.7 percent. They have diverse skills, and this provides benefits and challenges. The benefits are that our workers can perform complex, high-valued-added tasks. As George Mason University economist Garett Jones puts it, today's workers are building organizational capital, rather than making widgets. The challenge is that making optimal use of these sophisticated problem-solvers requires more than just increasing demand in a few basic industries.
Most jobs that are being lost today are due to permanent restructuring, not to temporary inventory corrections.
Finally, the data on the proportion of the unemployed who are not on temporary layoff has been trending upward. In the 1950s, reviving the automobile and steel industries could bring many of the unemployed back to work. Today, this is no longer the case. Most jobs lost today are due to permanent restructuring, not temporary inventory corrections.
The way I see it, the complexity of today's economy means that old-fashioned Keynesian policies will not restore full employment. Pump-priming and stimulus policies are a good fit for a manufacturing economy with homogeneous labor affected by temporary layoffs. They are not such a good fit for a post-industrial economy with an educated labor force facing permanent structural changes.
Over the next ten years, some sectors of the economy on long-term downward trends will continue to shrink. Sectors that became bloated in recent years, notably mortgage finance, will eventually settle back to lower, sustainable levels. Much of the new strength in the economy will come from underlying long-term forces. New workers will be absorbed by businesses that have not yet been launched in industries that we have not even imagined. For this restructuring, what I like to call The Great Recalculation, Keynesian stimulus will be irrelevant.
Arnold Kling was an economist on the staff of the board of governors of the Federal Reserve System and was a senior economist at Freddie Mac. He is a member of the Mercatus Center financial markets working group and co-hosts EconLog, a popular economics blog. He is the author, along with THE AMERICAN editor-in-chief Nick Schulz, of From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph over Scarcity.
FURTHER READING: Kling's other articles for The American include “Would Keynes Have Supported The Stimulus Bill?,” “How to Fix Healthcare Delivery,” and “The Problem with the Biggest Tax Break in America,” on reconceiving health insurance. He also wrote “Regulation and the Financial Crisis: Myths and Realities.”
Image by Darren Wamboldt/Bergman Group.