...a Hayekian artificial boom and inevitable bust with a very, very slight secondary deflation, and non-market clearing price controls on entry level labor.
Sunday, 4 October 2009
Greg Ransom comments on Marginal Revolution today that we have:
This is a reasonable summary of the Hayekian story, for which Greg consistently argues on my three favourite libertarian/monetarist blogs: MR, TheMoneyIllusion and Worthwhile Canadian Initiative.
The idea is that easy money leads to overinvestment in certain sectors, which end up consuming more resources than their stable long-term share of the economy. Housing being the key example in the 2001-07 boom, or Internet technology in the previous one.
When something goes wrong, the availability of capital rapidly shrinks and there's no more money to spend on all those houses in Nevada or foosball tables in San Francisco. Lots of housebuilders or programmers are thrown out of work and need to learn a new trade.
In this story, government stimulus just delays the inevitable transition of people and other resources from sectors which no longer add much value to those where they can be more productive. Therefore, not only is stimulus expensive but it acts as a brake on recovery and future economic growth. So do labour market regulations such as the minimum wage.
One appeal of this explanation is that it works reasonably well whether the boom is fuelled by credit (this time) or equity (last time). And it does seem intuitively right that there have been more people working in construction than is sensible.
But it does leave some key gaps.
First, why should easy money go into these sectors particularly? If money is cheap, why do people systematically spend it on houses or pets.com shares? Why don't they buy more cars, holidays or gold? Is there a behavioural tendency to spend on some things and not others, and if so why?
Second and more importantly, this reallocation process is going on all the time, even when there is a boom. During the last 15-20 years the number of Internet software developers has consistently increased, even with a small slowdown in 2001-2. Fewer people work as secretaries and more work as reiki trainers (many of them are even the same people). So what is the difference now, and why will a stimulus package stop it from happening?
In short: what are the numbers? What is the natural, sustainable rate of reallocation of people between sectors; how fast was it happening over the last six years, how fast is it now, and how fast should it be for optimal recovery and growth?
Keynesian and monetary macroeconomics, whatever their weaknesses, at least provide empirical data to support their hypotheses and calibrate the theories. Austrian economics, despite its useful insights, doesn't seem to bring any testability with it.
Austrians - please give me some data and prove me wrong.