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In Which Steven Horwitz Demonstrates That He Cannot Do Rocket Science--or Economic Science Either

An ill-wisher sends me a link to Steven Horwitz, who I last saw carrying water for Republican stimulus opponents with badly-reasoned and fallacious arguments that were past their sell-by date at least seventy years ago.

He is still doing it. At PBS. Shame on PBS--get someone half-competent, please:

Slapping the Obama Administration Upside the Head with a Bastiat Clue Stick: [T]he 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....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.

I thank Lynne Kiesling for the wonderful phrase "hit them with a Bastiat clue stick."

If Horwitz were--think of it!--to actually talk to Christie Romer or Alan Krueger or Chris Carroll or any of the people who are trying to track the effects of the stimulus program on the economy, he would learn that they are keenly interested in "crowding out"--on how much private demand for goods and services that would otherwise be there isn't there because of increased deficit spending. Even though they cannot see jobs that were never created, they nevertheless can count them--and are trying to do so.

Economics isn't rocket science. Rocket science is harder. Rocket scientists, however, are very good at counting things that cannot be seen. Consider the neutrino, for example: the existence and properties of the neutrino were analyzed and powerfully argued for by Wolfgang Pauli and Enrico Fermi in the early 1930s. But nobody "saw" a neutrino for twenty-five years after that.

And economists are good at counting things that cannot be seen. When increased government deficits crowd out private economic activity, they do so in one of two ways:

  1. The government sells extra bonds to finance its deficit, reducing the price of government bonds--and their substitutes, private bonds, as well. Because private firms seeking to raise capital find that they must sell their bonds for less than they had expected (or get loans on worse terms than they expected), they cut back on their operations and their expansion plans.

  2. The government's demand for goods and services leads the firms that provide those goods and services to hire extra workers. They thus bid up the wage--and other firms that would have produced goods and services find that it is no longer profitable to do so because the wage is higher than expected.

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.

We haven't seen any fall in government bond prices associated with the stimulus. We haven't seen any rise in wage inflation associated with the stimulus.

Romer and Krueger conclude that whatever crowding out is occurring is extremely weak, and cannot offset more than a trivial part of the surge in aggregate demand created by the stimulus.

That there hasn't been any wage inflation-induced crowding-out is, to me, not surprising: the fracking unemployment rate is ten percent, after all. The full-employment world of Bastiat is very very far away. And relative to the magnitude of excess supply in the labor market, the stimulus is simply not big enough to induce any wage inflation-based crowding out. So I am not surprised that there has been no wage inflation-induced crowding out: that is a normal and expected part of our empirical reality.

That there hasn't been any bond price fall-induced crowding-out is, to me, quite surprising. As I have said before, on June 29, 2007 there was $4.94T of U.S. federal government debt held by the public. Yesterday there was $7.85T. The U.S. government has issued an extra $2.91T of debt to the public in nineteen months. And the public has slurped it down--has been willing to hold it all in its portfolios at the same, nay at higher, prices than it was willing to do nineteen months ago.

This extraordinary price elasticity of demand for U.S. Treasury debt is, to me, astonishing, terrifying, and unexpected--I expected bond price fall-induced crowding-out to be showing itself by now. It is not, however, surprising to some other economists--people like Paul Krugman, Jamie Galbraith, and the ghost of John Hicks, all of whom did predict this and whose views must now be given some extra respect. For that there has been no fall in bond prices as debt held by the public has exploded, and hence no crowding out from the expenditures funded by the debt explosion, is a part of our empirical reality--even though I find it a surprising part.

So what about the Steven Horwitzes of the world? How do they deal with the fact that Romer, Krueger, and company are keenly watching for signs of the crowding-out that Horwitz mendaciously claims they are ignoring? How do they deal with the fact that we do not see either the bond price declines or the wage inflation accelerations that would be signs that crowding-out was at work?

They don't.

They shut their eyes.

They pretend that our empirical reality simply does not exist. They pull down the windowshades lest they see something outside, and lose themselves amidst their early-nineteenth century books, one hundred and seventy years behind the state of the art in economics--which is, or rather can be if you read widely and think hard, a progressive discipline.

Did you know that M. Frederic Bastiat's Essays on Political Economy contains no references to "panic" or "crisis" or "depression" or "unemployment"? Only a truly clueless idiot would try to take it as a source of wisdom on macroeconomic questions.