Reply to Robert Waldmann
By Arnold Kling
He writes a long post that agrees with some of what I write and disagrees with some of my views.I said that the labor force is becoming more heterogeneous.
As far as I can understand it, you are arguing that the Beveridge curve has shifted out… In other words you seem to be arguing that natural rate of unemployment has increased
Not quite. The more heterogeneous labor force does not necessarily raise the natural rate of unemployment. However, it makes it harder to recover from an adverse shock. In the 1950’s, when 4/5 of the labor force (and an even higher proportion of cyclical unemployment) is low-skilled workers, it does not matter where you raise demand–you’re bound to increase the demand for the workers who were unemployed. That is still true in 1970, when 2/3 of the labor force has a high school education or less.
Fast forward to now, when 2/3 of the labor force has some college education, and they are a significant component of unemployment. Now, in order to get them back to work you need to add demand that specifically uses their skills. This is a much harder trick to pull off. My Hayekian point is that this sounds like a task better suited to the market, not for Washington–hence my remark about “central planning.”
I think that a stimulus that allows the private sector to figure out resource allocation (my preferred approach being a cut in the employer contribution for Social security) is more likely to be effective than a stimulus where the government tries to figure out the resource allocation (health care IT, “green jobs,” etc.).
My third point about Minsky is that policymakers have got it all wrong by saying that we need to get lending going again. At this stage of the cycle, business expansion is going to come from profits, not from leverage.
In layman’s terms, the situation now is that borrowers don’t want to borrow, and risk averse investors don’t want to lend. The policymakers are trying to prop up/cajole banks into getting borrowers and investors to do what they don’t want to do. Why fight the market? If consumers don’t want to be NINJAs any more (a reference to buying homes with no income, no job, and no assets), fine. If firms don’t want to be in debt up to their eyeballs any more, fine. Let’s let folks recover the way they want to. In the case of business, that means prudent expansion based on earnings, not ponzi finance.