Is Blinder Going Off the Reservation?
By David Henderson
Co-blogger Arnold focused earlier this morning on part of Alan Blinder’s Wall Street Journal article, “The Case for Optimism on the Economy.” Arnold focuses on what he calls “the job assignment problem.” Arnold sees the problem as one of people figuring out what jobs to get as the economy goes through a large readjustment, which Arnold calls a “recalculation.” I agree that that’s an issue, but markets with wage flexibility generally handle that problem well. The two government policies that get in the way of wage flexibility (other than the decades-old grant of monopoly power to labor unions) that could relatively easily be changed substantially on the margin are the minimum wage and the extension of unemployment benefit duration well beyond the traditional 26 weeks. Recall that Peter Orszag sidestepped the question when asked last month if any of Obama’s economic team were against the most recent extension of unemployment benefits. My candidate for critic is Larry Summers, who wrote the article on unemployment for my Encyclopedia, in which he pointed out that extending duration of benefits increases unemployment.
I won’t comment on the fact that a Keynesian economist advocates Keynesian policies: no news there. Slightly more interesting is that a Keynesian economist sees, as modern Keynesians have for decades, having learned from Milton Friedman, that monetary policy can still be potent. What I found most interesting in Blinder’s article, though, were two sections. First, the following statement:
But the Fed, Treasury, FDIC and others have created a bewildering variety of stents and bypasses to get credit flowing again.
Note the word “bewildering.” I know Alan only a little but I think there’s a hint in there of discomfort on his part with the Fed’s and Treasury’s move into what is, in essence, industrial policy: picking the favored firms or industries that get special treatment.
The second passage is this paragraph:
There is more to the case for optimism. For one thing, less than 30% of February’s $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists dote on the fact that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package (“Please don’t call it a stimulus!”) looks to be in the works.
Now, Blinder doesn’t say that a second “job-creation” package is a good idea. He just reports it as being in the works. But notice that he admits that 70% of the stimulus is in the pipeline. Is he going slightly off the Democratic reservation and saying that even by Keynesian standards, the second “job-creation” package is not needed?