Demand Full Employment

Demand Full Employment

This was originally posted on the Occupy Seattle Blog.

Recently I read a blog post on Modeled Behavior about a piece written by Edmund Phelps on Keynes vs. Hayek. One interesting quote pointed out on the post was:

“What now do we do? With some luck, the economy will
“recover” through a return of investment activity to sustainable
levels once some capital stocks, like houses, have been worked
down. But it will not recover to a strong level of business activity
unless something happens to boost innovation. The great question
is how best to get innovators humming again through the breadth
of the land. Hayek himself said little on innovation. But at least he
had an applicable theory of how a healthy economy works.

The Keynesians, sad to say, show no understanding of how
the economy works. They think they can lever employment up or
down by pushing buttons – as if the economy were hydraulic. They
show no grasp of the concepts that would be necessary to restore us
to prosperity and flourishing. In an old image that applies well to
the posturing of today’s self-styled Keynesians, “the Emperor has
no clothes.””

Phelps (a nobel prize winner) is arguing that full employment won’t happen without innovation because proponents of fiscal stimulus don’t understand the economy enough to stimulate it. This is, unfortunately, wrong. We have a huge excess of industrial capacity:

and millions of unemployed and underemployed, 14.5% of the labor force. There are more productive things they could be doing than sitting at home wondering how they’re going to pay their underwater mortgages and student loans.

The 1930s were an amazing time for innovation, but we didn’t get to full employment in the US until we entered WWII. We had the government pull large levers on the economy and we put ourselves back to work on a great project: saving the world from fascism. Today the greatest threat to our freedom isn’t panzers, it’s a lifestyle built on cheap hydrocarbons.

Today, we have tons of unused economic capacity, some growth and lots of innovation happening, just not enough aggregate demand to use it. Government spending as a percentage of GDP is close to what it was shortly after the US entered WWII, but unlike Keynes we don’t need to make the assumption that what you spend money on doesn’t matter that much.

The science of climate change is clear: either we limit our carbon emissions or we face catastrophic results. Here are a few suggestions that help deal with both aggregate demand and climate change:

– Building and deploying renewable energy generators such as solar panels, wind turbines, geothermal plants and sea turbines.
– Developing and constructing scalable energy storage facilities (i.e. ones that don’t require more lithium than exist on the planet) so we can store and distribute power 24/7.
– Constructing a smart power grid that will allow us to efficiently deliver power from places that have energy to places that need it.
– Manufacturing and constructing electric high speed rail and light rail systems to replace air travel and single occupant automobiles as standard means of transportation.
– Building energy efficient, high density and affordable housing for people within our very productive cities.
– Deploying gigabit Internet connections to homes and businesses that are nearly 200 times faster than commonly used broadband.

Much of what what we need to do involves work on the scale of the Manhattan project to take what we know and turn it into what we can build, but a great deal can be done with technology we have today (PV panels, elevators, trains, etc.). Our community colleges would jump at the opportunity to retrain millions of Americans with skills we’ll need over the next few decades. All told, the cost of getting a lot of this done would be a lot. Think 4-6 trillion dollars of infrastructure, just for the US.

You don’t get out of poverty by sitting around waiting for work, which is what we’ve told 14.5% of the country to do while we figure out what we need them for. We need them. Our children and their children need them. We’re facing the deaths of millions if we continue our current path. I think fixing our energy, transportation and housing systems so that we don’t cause a world wide holocaust would be a good use of our incredibly massive economic capacity. We just have to demand it.