I am sometimes accused of failing to understand Keynesian economics. The arguments usually follow a few themes.
Some argue we all would be better off if everybody received higher wages, except perhaps the 1 percent. A variation of this is that private-sector workers deserve the wages and benefits found in the public sector.
I’d hate to see us design economic policy based on what we would like rather than what would work. Keynes and I would agree that it would be wonderful if every worker in this country earned more. Let’s imagine we passed a law that everybody must be given a living wage. We would find almost immediately that the price level would rise by the same amount as the average wage increase, unless there was a commensurate increase in productivity and output.
In other words, real wage growth occurs only if output grows at the same time. Otherwise, wage growth is nominal and inflationary. Demands for higher wages all are noble, but the policy is not.
Any mention of government workers, of which I am one, invariably invokes responses. Some assert that government salaries are not higher than private-sector salaries. They are correct. A recent analysis of Census Bureau data showed that government wages are only 1 percent higher than private-sector wages. However, the same study showed that government wages and benefits combined are 20 percent higher than private-sector packages.
Critics then retort that this is an unfair comparison. They claim government workers are more educated and skilled than their private-sector counterparts. That proposition is difficult to prove, given private-sector employees often receive significant job-specific in-house education or skills enhancement that may not earn a college degree but is nonetheless valuable.
Comparisons of public- and private-sector job productivity are difficult. We can easily measure private-sector job productivity per worker because their output is sold in a market. It is much more difficult to keep score of the productivity of government workers.
Our challenge is to create jobs that enhance output and efficiency. Keynes recognized that our goal is not to create jobs for jobs’ sake. It is the extra production, not the additional jobs, that allows an economy to expand or to recover from a recession.
Franklin Roosevelt put in practice this Keynesian insight by using an otherwise idle workforce to staff Works Progress Administration programs. He was advocating employment assurance, not unemployment insurance. By employing Americans in ways that augmented public infrastructure, we provided workers with the capacity to spend, but also enhanced the ability of the economy to produce the goods people suddenly have the income to buy.
We see that Keynesian policy is more subtle than many assume. A simplistic interpretation is the mantra for “jobs, jobs, jobs.” The demand ought to be “productive jobs, productive jobs, productive jobs,” but that phrase just doesn’t roll off the tongue.
Consider this story. An economist visiting China was offered a tour of a giant public-works project. There, digging dams and ditches were thousands of workers with picks and shovels, while large digging machines stood idle. The economist asked why workers weren’t using the machines. The Chinese official responded that this was also a jobs-creation project. The economist retorted that the official should take away their picks and shovels and give them teaspoons instead. Or, better yet, just let them stay at home and pay them regardless.
This story highlights the appropriate role for government to enhance productive employment during recessions, rather than create ineffective jobs. In bad times, government can expand our public infrastructure and, in turn, create temporary productive jobs. And, in good times, an austere government sector should devote itself to those areas it does best and most efficiently.
For instance, towns that have crews that trim trees might also maintain street lights, if they already have the vehicles and are already out and in the air. This is an example of an economy of scale in which the government may indeed be in the best position to help maintain our infrastructure. Government can enhance efficiency.
Sometimes, governments reduce efficiency. We pay idle workers to stay home and have their skills deteriorate, even when our economy is begging for workers reeducated in areas such as advanced manufacturing. In these times, we must expand education, but in a particular way. We should reallocate education to enhance 21st century skills, without neglecting other skills a modern society requires.
An effective stimulus program might retrain workers. We could retrain teachers too, especially from regions with declining populations, so they can teach mathematics or serve underserved areas.
Like life, our economy demands nuanced solutions. Government should be austere but still have a capacity to create productive jobs when an economy is mired in a recession. Too often, we are Republicans or Democrats forever. I think either political philosophy makes sense in certain circumstances, and neither is sufficiently nuanced to effectively address all circumstances.
Wisdom requires a sufficiently open and flexible mind to appreciate nuanced approaches to complex problems in an evolving economy. While we might wish otherwise, there are no timeless and universal solutions. We will have to drop the dogma if we are to meet our challenges.
Colin Read is a contributor to Bloomberg.com and has published eight books with MacMillan Palgrave Press. He chairs the Department of Finance and Economics at SUNY Plattsburgh.