Maximizing GDP or Maximizing Employment
Here’s a good point from Mark Thoma and Pavlina Tchernevna about fiscal stimulus. If what you want to do is increase the budget deficit by some amount to decrease unemployment, the most efficient way to do that on a dollar-per-dollar basis is to spend the funds employing the unemployed people on public projects of some kind. But though this is a highly efficient way of getting people into jobs it’s not at all the most efficient overall allocation of the money. But that in turn means that if you spend a lot of time and energy trying to design your stimulus to be efficient in the sense of getting real value for your money, that you almost certainly won’t be getting the most employment bang for your buck.
A stimulus designer, in other words, faces a choice at the margin between maximizing GDP and maximizing employment. And when constructing ARRA both congress and the administration tended to choose GDP. Over time of course GDP growth will lead to employment growth. But as we know, there are substantial lags in this process and perhaps a case to be made that it makes more sense to do things the other way ’round. Certainly one concern I have with regard to the tangible infrastructure projects that ARRA is funding is that the administration’s zeal to avoid anything that looks like “waste” is itself creating a wasteful level of delay and waste-monitoring, when it would make more sense to just plunge ahead and get projects out the door.
11 Responses to “Maximizing GDP or Maximizing Employment”
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July 3rd, 2009 at 4:18 pm
But though this is a highly efficient way of getting people into jobs it’s not at all the most efficient overall allocation of the money.
What is your definition of efficient? Tcherneva is exactly right. The work should be as useful as possible, but it should be work, and especially work for those without money.
July 3rd, 2009 at 6:40 pm
And lastly we have maximization of actual welfare, something the market provides. GDP is of little importance, when we can add to it by digging holes and filling them in.
July 3rd, 2009 at 7:09 pm
Stimulus, regardless of the type, will have little or no effect on the Nation’s structural deficiencies. Even the best kind of stimulus can only reach the level of temporary panacea.
The Roosevelt administration tried a similar approach during the Great Depression. They applied numerous stimulus packages over the years. These repeated attempts proved moderately successful, but at no point did Depression era stimulus policy effect true, fundamental changes in the economy.
In fact, in 1941, after more than a decade of widespread economic hardship -9 of those years spent under Roosevelt’s stewardship- it is possible to conclude that Depression levels of GDP growth and unemployment would continue to be a natural state of affairs.
But in 1942, the United States decided, finally, to radically alter its economic approach. US central planners rapidly applied a purely Keynesian economic model, and the Great Depression came to a quick and merciful conclusion.
Note: Why Keynesian economic theories are endlessly dissected in relation to the period 1933-1941 is beyond me. His ideas were, at best, applied intermittently during those eight years, if they were applied at all. No, Keynes’ theories should be examined and rated for their performance in the years 1942-1945, when they were fully implemented. This is never the case, however.
July 3rd, 2009 at 7:13 pm
On reflection, it seems the stimulus was pathetically small to have a significant impact. It was also poorly designed with much too little infrastructure projects. This is not really a fault of the White House, but rather Congress and those pesky Republican and conservative Dem senators who refused to pass a bill that was more than $800b and which didn’t waste over $70b in a stupid tax proposal.
Contrast the measures taken in the US to those in Australia, where the government has committed something close to $40b in stimulus, 75% of which is for infrastructure. Close to 50% of the stim is timely, temporary and targeted whereas only 12% or so of the stimulus in the US is.
What is clear then is that the system of government in Australia is more suited to large, rapid responses to crises than the one in the US. Parliamentary democracies appear far better than the US system at present.
Why is it that few bloggers openly advocate for a change in their governmental processes, now that they know it sucks so much? Or, why not at least take steps to change, such as getting rid of the filibuster? Instead of “Prosecute torture now” the left in the US would be better suited to a platform of “Terminate the filibuster in 5 years time”.
July 3rd, 2009 at 8:14 pm
There certainly is a tradeoff of GDP verus employment maximization in a stimulus, but Congress was hardly maximizing GDP.
July 3rd, 2009 at 9:58 pm
Dear Mr. Yglesias,
I have noted little evidence that you read the threads that emanate from your posts since I have read some threads that have 20-25 posts in a row explaining, in very simple terms, the fundamental economic concepts that you seem to ignore and keep on ignoring.
If by any change you happen to read this, please pay attention. There are only two ways for GDP to grow: through population growth or through growth in productivity. Think about it. If a country could grow simply by printing money and making it circulate through the economy, there would be no poor countries in the world. Unless you accept that there is no magic bullet, your commentary on stimulus plans will continue to be nonsense.
July 4th, 2009 at 7:38 am
Really? That’s interesting… I had no idea that capital and labor inputs have no effect on the economy’s output. It’s very intriguing. So according to you, recessions are impossible and the business cycle doesn’t exist, since they would imply a contraction in the economy, or a loss in worker productivity…?
July 4th, 2009 at 1:21 pm
Capital (machinery, tractors, etc.) increase productivity. I think you are the one confused.
July 6th, 2009 at 2:30 pm
[...] into a two-year stimulus plan, and these things take time to work. Maybe the administration was too overzealous in trying to determine where the unemployment rate was going to go, but Boehner’s using that [...]
July 7th, 2009 at 5:26 pm
[...] Part of the issue is that a higher proportion of French projects seem explicitly designed to maximize employment rather than serve top-tier policy priorities. This stuff, for example, is more reminiscent of [...]
July 9th, 2009 at 7:51 pm
Maximization of actual welfare would be best. Of course, the market doesn’t provide that any more than the government does (a free market actually provides *minimization of economic profits*, which is something else entirely — did nobody take economics?).
The evidence shows that the utility curve for money is shaped such that giving money to the poor helps more than giving money to the rich. Meanwhile, it’s obvious that money on things many people benefit from give more utility than money on things few people benefit from.
So, spend the money on popular infrastructure (hint: people like trains and parks — and before that, they like clean water, good sewer systems, and clean air), and when done with that, give cash to poor people. So much for what economics tells us.