Friday, 24 June 2011

Let’s keep the poor in their place.

The excuses for not raising demand and reducing unemployment are a wonder to behold. Economist Michael Spence has an article in the Wall Street Journal today with a series of these excuses.

He starts his article by claiming that the root cause of current high unemployment levels are structural. So the collapse of various banks three years ago and the credit crunch had nothing to do with it? The sharp rise in unemployment just after those bank collapses was entirely coincidental? “God first makes mad those he wishes to destroy”, as the saying goes.

Spence then claims that employment in non-tradables will not rise because of “government budget woes”. Strange then, that Sweden manages to devote a much larger proportion of GDP than the US to public spending, while having a much smaller debt and deficit than the US. America’s political right just can’t work this one out because they are thick.

And before some right wing thicko accuses me of advocating an expanded public sector, I’m not. I’m concentrating on the ECONOMICS. The decision as to what size the public sector is, is a political decision, not an economic decision - a distinction with which citizens of the US seem to have much more of a problem than citizens of Europe.

Spence then points to the blindingly obvious fact that several large less developed countries are getting their act together, improving their levels of education and so on. This means they now compete more effectively with skilled Americans. And from this he concludes that the only solution is for the US to spend more on education, infrastructure and so on. The flaw in this argument is as follows.

Where a country has a comparative advantage, the relevant products will tend to be exported.

But if that comparative advantage is lost, the relevant products will no longer be exported. What of it? The UK used to have a massive comparative advantage in steel shipbuilding: it used to build HALF the world’s steel ships. Then other countries caught up.

According to Spence’s crazy logic, the UK should have busted its guts and spent billions subsidising steel production, ship-building and so on.

The policy which actually makes sense when comparative advantage is lost is simply to cease exporting the relevant products, and turn to the next best form of economic activity. And that may involve exporting, or it may not. It really doesn’t matter.

If the next best products happen not be exportable, then obviously the balance of payments suffers and the currency depreciates. But what of it? The British pound fell by 25% in 2008. Scarcely anyone in the UK has noticed. It’s been nice for exporters who have taken on more employees. Otherwise, the UK population has been completely unmoved by this massive non-event.

Spence then claims the US needs to “aim to help raise savings rates so we can finance our own investment”. What, so with interest rates at an all-time record low there is some problem funding investments? And with US corporations sitting on all time record piles of cash they can’t work out how to fund investments?

As I said, God first makes mad….


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