Deficits vs. Unemployment: You’re Wrong, America

This is worrisome:

According to a new poll, American voters say that reducing unemployment is more important than cutting the federal budget deficit, taking the Democratic side in what is expected to be an ongoing debate in this midterm election year.

By a ratio of better than 2-to-1 — 64% to 30% — the poll respondents said that reducing employment is the priority, according to the Quinnipiac University poll released Thursday. The national unemployment rate is about 9.5%.

The either/or structure of this question includes an unspoken assumption: that these are competing goods, rather than complementary goods. It is as likely that our stimulus efforts are making unemployment worse as it is that they are making it better.

But here’s the thing: The government can cut the deficit — today, right now, this instant, if it should decide to. Government cannot manage employment, or any other economic factor, as well as the American people think. If the effects of economic policy were regular and predictable, then there would never be a recession, and there would be no unemployment. Politicians have really good incentives to support policies that promote economic productivity, high wages, full employment, and great long recessionless expanses of growth. The problem is: They do not know what those policies are. Nobody does: The economy is far too complex, the information embedded in it too vast, for any person or institution to achieve the kind of understanding of its workings that would allow micromanagement (or even very ambitious macromanagement) from Washington. They literally do not know what they are doing.

The federal budget, on the other hand, is relatively easy to get one’s head around, once you get used to seeing figures in the trillions. And we do have good reason to believe, from long experience, that large public deficits and heavy government debt are a drag on the economy. So, stop stimulating and start cutting.

Another thought: Stimulus is an income-substitution game. The argument about extending unemployment benefits, for example, emphasized the need to replace the purchasing power of the unemployed. Most other stimulus arguments have to do with replacing lost income. And that’s fine, so far as it goes, but: Our current economic distress is not principally a question of lost income, but of lost wealth – all that devalued housing and mortgage-related securities. Stimulus spending cannot replace that lost wealth. Many Americans feel poorer, and are acting poorer, because they are poorer, the value of their largest asset, the family home, having decreased substantially. And their investment portfolios aren’t in great shape, either.

As a consequence, we are spending less on lots of things — why should we be spending more on government? It’s one of the least productive things we spend money on, and every dollar we throw away by trying to stimulate the economy with beekeeper subsidies is a dollar that is not available for productive investments of the sort that produce real goods and services, build real wealth, and create real employment.

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