ZMP

Tyler Cowen and other semi-conservative economists are flogging the notion that the unemployed are unemployed because they aren't worth their keep - that they aren't being hired because they can't produce enough value for it to be worthwhile for an employer to hire them. Economically speaking, they can produce only zero marginal product.

The advent of the automobile caused the transportation value of the horse to drop below the value of the cost of maintaining him, so a lot of formerly useful horses earned a ticket to the glue factory. Is that the designated fate of the American unemployed, metaphorically anyway?

Paul Krugman and other Keynesians maintain that the actual problem is insufficient aggregate demand - there just aren't enough people willing and able to buy stuff. At one level, both explanations are almost tautologically true. Given large enough demand, everyone would be hired. If employers were convinced the hiring someone would produce a profit for them, hire they would. The point is that these aren't clearly distinguishable factors. High unemployment drives down demand because the unemployed have no money and the employed are afraid to spend for fear of losing their jobs. The complementary effect is that hiring someone to produce something isn't going to happen if there is no one willing to buy it.

What has happened in the US is that a lot of jobs have gone away but total sales have not declined that much. Partly this is because the things we buy are being produced elsewhere, but partly it's because productivity gains have made it possible for fewer people to produce more.

So what are the alternatives, short of the glue factory? Here are a few things I've heard.

(1) A massive federal jobs/stimulus program to increase aggregate demand - at the cost of piling up a lot more debt.

(2) Drastically restructure taxes and other regulation to stimulate hiring

(3) (2) above and take actions to greatly facilitate business formation, making it very simple for anyone who wants to start a business to do so.

(4) Have the US, like China and Germany, adopt an industrial policy to encourage manufacture in the US and exports.

(5) Restructure our education, employment, and welfare programs to get everybody sellable skills.

(6) Hunker down and hope the problem goes away.

Needless to say, (1) will not happen and 2-5 are improbable. So it looks like (6) it will be.

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