David Brooks' Parallel Universe

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Tuesday, 08 May 2012 04:07

Just in case you thought that the failure of austerity in the United Kingdom and across the euro zone, and its rejection by voters in France and Greece, might be cause for changing course, David Brooks has a column to tell us otherwise. He says that there are two different arguments going on over economic policy which unfortunately don't intersect.

First, we have the cyclicalists who worry about silly things like 25 million people who are unemployed, underemployed or out of the workforce altogether. These people are also likely to worry about the millions of people who are losing their homes and probably also the children of the unemployed, underemployed and displaced homeowners.

Then we have the far-sighted structuralists like Brooks who worry about the long-term. They worry about fixing government deficits and getting us the labor force that we will need in the future.

This is a great division that has considerably less to do with reality than Middle Earth and the Munchkins. What could Brooks possibly be drinking when he thinks that he has identified a group of economists/policy wonks who are only concerned about the cyclical problem of high unemployment and not the structural problems that created them?

For my part, I have been yelling about the structural problems for more than a decade. I have written books on the structural problems of the economy, like Plunder and Blunder: The Rise and Fall of the Bubble Economy and The End of Loser Liberalism: Making Markets Progressive (free download available). I made the argument (unlike Brooks and his structuralists) that the underlying structural problems in the economy would create the sort of cyclical problems that we are now seeing as a result of the collapse of the housing bubble.

I don't know anyone who looks like cyclicalists that Brooks writes about. It would be good if he could toss out a few names for readers so that we know such people actually exist in the world and are not just Brooks' hallucinations.Since the views Brooks attributes to the cyclicalists are sufficiently bizarre, it is hard to believe that such people exist.

For example, he tells us that the cyclicalists believe:

"the level of government spending is the main factor in determining how fast an economy grows."

I have never come across anyone who had a view anything like this. I do know many economists who argue that in a downturn more stimulus will lead to more economic growth, but this is nothing like the view that Brooks attributes to the cyclicalists. Does Brooks really think it is the same thing to say that more stimulus leads to more growth in a downturn and saying that government spending is the main factor determining growth in general? This is scary.

Brooks also tells us that unlike the cyclicalists, the structuralists:

"believe that the creativity, skill and productivity of the work force matter most, and the openness of the system they inhabit."

Again, I know of no one involved in economic debates who does not believe that the productivity of the workforce is the main factor determining the wealth of an economy in the long-term. Of course there are sharp divergences from this long-term path. Our workforce did not suddenly get a lot less productive in 2008 than it had been in 2007, nor did it become less productive in 1930 than it had been in 1929.

The real amazing part of Brooks' column is that after ridiculing the cyclicalists for "railing" about the unnecessary suffering in the United States and Europe, he repeats trite cliches that have no basis in reality to tell us about the economy's real problems.

He begins with the problems:

"surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows."

Apparently Brooks doesn't know that productivity growth is the norm for an economy. It was actually more rapid in the three decades following World War II than it is now with Brooks' "hypefficient globalized companies." We do see superstar salaries at the expense of the middle, but these are more typically the result of the ability of the superstars to manipulate the political process to their advantage than any obvious superstar skills.

For example, the multi-millionaire traders at Wall Street's too-big-to-fail banks profit primarily by their ability to get an implicit subsidy in the form of bailout insurance from the government. The CEOs who pocket tens of millions as their companies are run into the ground benefit primarily from being able to appoint the directors who decide their salaries. The fact that doctors can often get paychecks well into the hundreds of thousands is attributable primarily to their ability to limit the number of foreign doctors who can enter the country.

There may be some exceptions, but it's generally easy to find the government policy that creates the basis for the superstar salaries that Brooks touts. Of course, it's quite advantageous to the beneficiaries of these superstar salaries to have people like Brooks saying that it's all "globalization and technological change," but those of who don't get paid to say this stuff need not take such arguments seriously.

Then Brooks gives us the line freshly drawn from the 1935 Washington Post:

"Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers."

If you think you have seen this one before, that's because you've seen it before, and heard it repeated endlessly in all sorts of contexts. Here's the Washington Post in 1935:

"unemployment may run into the millions, but as the iron, steel, and metal-working industries improve, a scarcity of skilled workmen is developing, states the magazine Steel this week."

There are clear market signals of the sort of mismatch of jobs and skills that Brooks describes. We should see sectors of the economy where there are large numbers of job openings relative to the number of unemployed workers. We should see sectors where the average workweek is increasing rapidly. The logic is that firms who cannot find additional workers make the existing workforce work longer. And most of all, we should sectors of the economy where wages are rising rapidly.

People who believe in markets would look for this evidence before making bold assertions about employers being unable to find qualified workers. By contrast, Brooks just makes this assertion with no evidence whatsoever.

Finally Brooks concludes by telling us:

"make no mistake, the old economic and welfare state model is unsustainable."

This should prompt a really big, "huh?" Brooks had just been touting the German model. Germany certainly has a much more generous welfare state than the United States, even if it has been rolled back somewhat in the last decade. We could also look to Netherlands and the Nordic countries, all of whom have much more generous welfare states than the United States, yet don't in any obvious way appear to be on an unsustainable growth path. It's not clear what point Brooks thinks he is making.

The United States does have an unsustainable health care system. If health care costs follow the course projected by the Congressional Budget Office, then we will face serious budget problems, but it will also have a devastating impact on the private sector, as few people will be able to afford health care.

The main problem here is that the special interests (including many of Brooks' superstars) have been able to manipulate the rules so that they can gain huge rents. A simple fix would be more globalization so that people in the United States could take advantage of more efficient health care systems elsewhere in the world. But this would require overcoming the opposition of protectionists like Brooks.