Demand Stimulus in a Jones-Minsky Economy
By Arnold Kling
In a Garett Jones economy, a worker represents an investment. A firm can vary its production without adding or subtracting workers. At the margin, what workers do is provide additional capabilities, what Jones calls organizational capital.
In a Hyman Minsky economy, investment is cyclical. Right after a crash, firms use “hedge finance,” meaning that they invest out of profits. As their confidence recovers, they use “speculative finance,” meaning that they are willing to borrow to invest, as long as they see believe that the profits from the investment will repay the borrowing. When they become euphoric, they engage in “Ponzi finance,” where they borrow because asset prices are being marked up so rapidly that they can repay today’s borrowing by borrowing even more tomorrow. When this becomes evidently unsustainable, you get the crash.
We are in the post-crash phase of the Minsky cycle. In a Garett Jones world, a demand stimulus that increases output does not generate a proportionate increase in employment. Hence we read of The Death of Okun’s Law (thanks to Mark Thoma for the pointer).
In a Minsky economy, at this stage of the business cycle firms are looking for profits as their source of investment. And in a Jones economy, they look at workers as an investment. Hence, we can see that profits are the key to getting employment to rise.
Next, add–what else?–the Recalculation story. The Recalculation story says that the market is trying to figure out where to reallocate workers. Unless government technocrats are brilliant enough to know which workers belong where, demand stimulus will raise output without raising employment.
The good news is that with output rising faster than employment, profits should increase, and indeed they have. In a Jones-Minsky economy, this will eventually lead to higher employment, as firms invest those profits. Of course, they can sit on those profits for a while.
Putting all this together, I would be willing to bet on the optimistic side of the usual forecasts for employment, which seem to be based on extrapolating the recent past (when employment has been lower than the models forecast) into the future. Instead, I think that firms have restored profitability to the point where they are not going to be as ruthless about laying off workers and they are going to be a bit more relaxed about hiring new workers.
The unemployment rate is so high and the recalculation problem is so severe that it is bound to take many years to bring the unemployment rate down to even as low as 6 percent. But I think that the rate of job growth will soon pick up faster than most forecasters expect.
Finally, my view implies that stimulus does work. However, on a dollars-per-job basis, fiscal stimulus would work better if it were focused on increasing profits sooner. By throwing money at consumers and at state governments, the stimulus is taking a lot longer to have an effect.