DeLong on Horwitz on Bastiat
By David Henderson
Warning: I’ve got to leave for a seminar in a few minutes and so I’ll be brief. I won’t explain everything Bastiat said, everything Steve Horwitz said, or everything Brad DeLong said. I just want to home in on a mistaken way DeLong used to judge Horwitz’s argument. I also won’t bother spending time talking about Brad DeLong’s tone and I would ask commenters not to bother either. The easiest thing in the world–and, frankly, the most boring–is name-calling.
A few days ago, Steven Horwitz wrote the following:
Even with those flaws, the Administration’s accounting is still one-sided. What it doesn’t consider are the jobs lost due to the very policies that are “saving” jobs. Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy. The jobs that weren’t created because the private sector lacked access to capital due to increases in government borrowing should be offset against whatever jobs the stimulus supposedly is creating.
The problem, of course, is that what was never created cannot be seen and therefore cannot be counted. The French economist Frederic Bastiat once defined economics as the art of seeing the unseen. It may be true that we can “see” it by recognizing the unseen effects of policies, but if you can’t count what you can’t see, you’ll always lose out in the numbers game. The result is that estimates of the net employment effects of government programs will always be biased in favor of the program’s effectiveness. The inability to count what we can’t see should give us long and serious pause when reading about the jobs “created or saved” by the stimulus package.
In response, Brad Delong wrote (I’m reproducing what I regard as his key paragraph):
In both these cases, it is true that we cannot see the jobs that haven’t been created. But we can see the price changes that caused those jobs not to be created–just as we cannot see the neutrino, but we can see the Cherenkov radition emitted as a neutrino passes and triggers the creation of an electron moving faster than light. In the first case, we detect crowding out through the fall in bond prices and the rise in bond interest rates accompanying the non-creation of private sector jobs. In the second case, we detect crowding out through the rise in wages and the wage inflation accompanying the non-creation of private sector jobs.
Focus on the last sentence. It’s wrong. And, ironically, given the way DeLong dumps on Bastiat, it’s wrong because, in a sense, DeLong forgets to look at what is unseen. If wages are not falling, then that well could be due to extension of unemployment benefits and some of the additional spending in the stimulus package. DeLong has arbitrarily chosen zero real-wage increase as his baseline. But in a readjustment, what Arnold Kling calls a recalculation, there’s a case to be made for some real wages to fall. At those lower real wages, some of the currently unemployed would be employed. Those jobs that aren’t created, therefore, are a cost of the stimulus package. No one, including Steve Horwitz, claimed that there was a one for one. So the jobs not created by the private sector are indeed a cost of the stimulus package.
And notice how carefully Steve Horwitz put it:
The result is that estimates of the net employment effects of government programs will always be biased in favor of the program’s effectiveness.
He didn’t say that there are no new net jobs created, just that we need to net out the job loss. Would DeLong really disagree with that? Hard to believe he would.