Last week The Kansas City Star featured a story on UMKC’s economics department. Known for its outside-the-mainstream approach to the science, UMKC is home to many so-called heterodox economists. Among them is Randall Wray, who has an interesting proposition to relieve unemployment. He wants the federal government to just hire everyone.
Wray believes that traditional mainstream, or Keynesian, government methods for lowering unemployment are undesirable because they “work at the wrong end of the job market” (Austrians would argue that any government method is undesirable, but I digress). By this he means government contracts tend to bid up the cost of labor and other capital, thereby depriving other businesses of these scarce resources. Instead, Wray would like to see the government start by hiring unskilled labor directly.
“[T]he market doesn’t want their labor,” he said. Under Wray’s idea, “[g]overnment would essentially bid on workers the market place didn’t bid on.” He does acknowledge that government spending can lead to inflation under certain conditions, but believes it can be avoided because the money used to pay the unemployed is demanding “idle resources.”
Wray admits the market doesn’t want these workers, at least for the wage they are required by law to offer. This should be a huge indicator of their marginal productivity, or lack thereof, which is the sole purpose of acquiring labor. Firms do not hire people in order to create employment. Markets do not exist to provide jobs.
Output is the end; employment is merely the means by which businesses achieve this goal. As long as the focus is on reducing unemployment, rather than realigning the capital structure, recovery cannot be achieved. Just as the problems with the housing market cannot be solved through manipulating prices, so too, the problems with labor markets cannot be eliminated with government programs. Minimum wage laws, unemployment entitlements, taxes, labor union rules, and myriad government regulations all contribute to pervasive, extended unemployment.
Wray dismisses the concerns of those who warn of inflation by noting that when the banks took TARP money it didn’t lead to inflation. The problem with this argument is that an individual isn’t the same as a bank and therefore has a different use for the money. Workers are also consumers. The money they receive in wages makes its way into the economy rather quickly. Banks on the other hand do not just release their money into the market. In large part the TARP money is still sitting on deposit at the Fed. Only when they release it will it lead to (price) inflation.
This last point is important – the definition of inflation. To virtually all economists, sans the Austrians, inflation is simply a rise in prices. The reality however, is that inflation is a rise in currency units, such as the dollar or the Euro. The rising price is merely a symptom of inflation; the natural consequence of debasing the currency.
Paying millions of people above market wages to do nothing of economic value would be bad enough. But the attending decline in purchasing power would ensure that real wages would fall dramatically. No doubt Wray believes that price controls would then be necessary to prevent “price gougers” from “preying” on consumers. And so the never ending cycle of intervention would continue.
It’s important to note that if relieving unemployment is desirable then government hiring, of any kind, is not to be preferred. Whether it’s via contract or simply direct hiring, anytime the government engages in such activity it necessarily diverts labor and capital from productive use. The capital that is consumed by government projects is done so under political calculation, where there is no way to determine whether the most efficient use was made of those resources.
Private investment is made using market calculation, where profit and loss determines efficiency. In this way scarce resources are channeled into the most productive areas, and only the owners are subject to the risk. Entrepreneurs who best gauge the market are rewarded and those who make poor decisions lose market share.
At best, government policy can only manage to temporarily stall economic reality. At worst, government policy can result in the deaths of millions of people and the vast destruction of their wealth. It can’t change the immutable laws of economics any more than it can reverse the laws of physics. Pretending that it can is just as foolish.