I don't agree with a whole lot of this Robert Reich post, but he is spot on with this paragraph:
The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.
Recalcuation Theory, in a very, very small nutshell. The sooner this reality is addressed, the better.
(HT: EconLog)
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I find a few differences between what Reich is saying and Recalculation Theory. If I understand correctly, Recalculation Theory attributes unemployment and failure to marshal economic resources to a shift or "recalculation" in the economy, essentially a very sticky labor market. This makes a good amount of sense, but is not what Reich is saying.
ReplyDeleteRR is commenting on the disappearance of whole swaths of the US labor market due to the cost cutting measure brought on by the recession. This is different because:
1. It is not frictional unemployment as long as the economy remains well below full productivity. The main goal of the stimulus and loose monetary policy right now is to shift the means of production back to full capacity, which Kling believes is only delayed by stimulus and lax monetary policy.
2. Upon an assumed return to maximizing the production function (equally as worrisome, but we can save the discussion for another post), the section of the labor force that was laid off and is expensive by the standards of the new economy or under qualified for wages they demand will not be mobilized towards a more productive part of the economy. Reich points out that as unskilled labor can be exported or roboticized more and more a large piece of the American labor market will be left idle despite the optimists’ prediction of a recalculation. What Reich proposes are massive government spending to reposition our labor market including "early childhood education for every young child, excellent K-12, fully-funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good health care, more basic R&D that's done here in the U.S., better and more efficient public transit like light rail, a power grid that's up to the task." Pumping up the production function (http://en.wikipedia.org/wiki/Exogenous_growth_model#Macro-production_function ,
http://en.wikipedia.org/wiki/Cobb%E2%80%93Douglas) can only happen by increasing three variables K (capital), L (labor), and A (productivity). K and L are cheap short run fixes that the stimulus is trying, but can't be sustained. As Prof. Goldsmith would have said, changing productivity is the best way to manipulate the production function, but it's also the most difficult!
The way I see it is recalculation is wrong in two distinct ways. The first is because units of labor are not comparable. Kling views a unit of labor as better\worse in terms of more\fewer widgets produced per hour, but economies don't produce widgets. Laborers create value in many different ways and to propose that it is even possible to shift one unit of labor from say, factory line production to accounting is a fallacy. As labor becomes more specialized I imagine we'll see more pain in the labor market as a result of supposed recalculation. In my book, it's not recalculation if a whole generation loses its means of employment and the only way our economy gets back on its feed is to wait for the new crop of educated kids comes up. In the long run we're all dead.
Second, I'm not sure how Kling views Government interference like, education, or health care, or any other public good that would increase productivity, but I have a feeling he thinks the market could recalculate that too. Individual incentives to solve a tragedy of the commons problem are unlikely to produce a healthy result. Unfortunately a lot of increases in productivity are extremely complicated, and throwing free market rhetoric at them won't fix it.
*typo above. feed should read feet
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