Getting to Recovery

Hey look, I took a major Austrian insight and re-named it “technological frictions”.

Appearantly there is specialized labor and capital. Maybe he will say this occurs in economies with division of labor.

In my mind, it is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative, equally productive enterprise.

Errm, isn’t this a bit of a strawman? Most of our unemployment and retraining programs claim nothing of the sort, but rather, by providing insurance against loss of income from unfortunate concentrated investments in skills, help individuals diversify away risk without reducing individuals’ risk taking, and without increasing societal risk. Absent this societally-provided insurance, individuals would separately have to self-insure (Shiller’s various risk-sharing contracts having gotten essentially zero traction), tying up many times the financial assets in low-return savings, while still not providing the protection that a well-functioning society can. (Yes, not necessarily does. Those who repudiate the notion of a cooperative society should not be entrusted with the control of it.)

Having a society that provides such lender-of-last-resort and insurer-of-all-reinsurance would seem self-evidently valuable. The history of pre-FDIC banking, and pre-regulatory insurance are so full of fraud and loss that I cannot imagine why we wouldn’t want those protections provided at the very small cost that we pay.

And if by “throw[ing] the banks under the bus,” you mean to force a handover of the keys, I’m with you. But not because I’m PO’d at bankers; rather, their firms, the corporate persons, have willfully broken their contracts (to be able to repay depositors without Federal intervention) and the owners cannot be trusted with Other People’s Money. Those owners are the shareholders, not just the managers to whom they gave reckless, unsupervised license.

We need to effect a handover from those who profiteered by excessive leverage, no matter whether the Fed and FDIC gave forebearance or not — even Mr. Greenspan expected “discipline of the market” as a remedy to risk management problems. As Lehman indicated, it might be a tad delicate. But the goal of turning over banks to (new) owners who will operate under sensible rules should not be overlooked in the attempt at delicacy.

Observe the example of Japan. Pouring stupendous amounts of “stimulus” on the economy has not resulted in growth, merely consumption and unsustainable government debt.

I conjecture that this is what happens when you stop the destruction part of capitalisms creative destruction. If no one important can fail, no one can succeed at anything important, we get stagnation at the top, and hence no growth.

Government can enable people to consume, but can only obstruct them from producing.

In respone to Geting to Recovery, I agree with James Hamilton, in his paper he investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role.
Although I would add that with the over-abunadance of skilled work force in a down sizing economy, the thought that “workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve” may be unrealistic, “the jobs here” are not available any longer and retraining is both an expensive and and somethimes lengthy process with no a guarantee of a new job in a new field.
We have been out sourcing so many jobs abroad to avoid the unions and high wages paid in the US,we do not have fall back jobs for workers.

Source:
James Hamilton,A Neoclassical Model of Unemployment and the Business Cycle,
Journal of Political Economy, 1988, vol. 96, issue 3, pages 593-617, Copyright 1988 by University of Chicago Press.