My January 20, 2021 letter to President Joe Biden, Ryan Bourne: Sure, governments can “create jobs” – you could always put everyone to work in some capacity through getting people to pick up litter (think of Milton Friedman’s famous example of giving canal building workers spoons instead of shovels to create more jobs). But what delivers prosperity over time is the process of value creation in markets delivering jobs that serve our ever-changing wants and needs!

Ep. 4 – From Cradle to Grave [6/7]. Milton Friedman’s Free to Choose (1980)

January 20, 2021

President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President,

Thank you for taking time to have your office try and get a pulse on what is going on out here in the country. I wanted to let you know what I think about the minimum wage increase you have proposed for the whole country and I wanted to quote Milton Friedman who you are familiar with and you made it clear in July that you didn’t care for his views! Let me challenge you to take a closer look at what he had to say!

Joe Biden’s “Full Employment” Economists

Joe Biden has nominated economist Cecilia Rouse to chair his Council of Economic Advisers, with Jared Bernstein and Heather Boushey as members working alongside her. That announcement drew a common reaction from progressive commentatorsand economists: that it was great news that Biden had chosen candidates committed to “full employment.”

This concept can be a bit of a minefield for non-economists. When economists say “full employment,” they generally do not mean a situation where “everyone is working” or even “everyone who wants to work has a job and the hours they desire.” Instead, they usually define “full employment” as a situation when unemployment is at its natural rate, i.e. when the economy is operating at its full, realistic potential (with only those between jobs, or who will find it near impossible to get jobs, out of work).

This definition throws up all sorts of disagreements between academic economists that can mean people talk past each other on the desirability of the goal.

The level debate

First, economists argue over what level of unemployment constitutes full employment, and thus how far we are away from it. On the face of it, the U.S. appeared very close to something like it prior to COVID-19 hitting, with unemployment at a five-decade low, the prime-age labor force participation rate having risen sustainably for the first time since the 1980s, and African-American unemployment at its lowest level since the 1970s, as real compensation grew strongly.

But the “natural rate” of unemployment is a moveable feast and difficult to predict with any certainty. Over the past decade, the Federal Reserve and others have revised down their estimate of the natural rate from near 5 percent to closer to 4 percent. Trends therefore suggest they were initially overly pessimistic, although the natural rate can vary year-to-year. Some economists even think there was still substantive slack in the labor market in 2019, with a lot of workers desiring longer hours and the potential for those “economically inactive” to be pulled back into the labor force if only the opportunity arose.

How to lower the natural rate debate

Second, economists argue over whether particular “structural” policies could reduce the natural rate of unemployment and so enhance the number of people we’d expect to be in work at “full employment.” Libertarian economists like me would say that if only governments didn’t gum up labor markets through policies such as minimum wage laws, unemployment insurance, and land-use policies that reduce the mobility of workers, the natural rate of unemployment would be lower.

More progressive economists tend to favor the idea that there are structural barriers to entry in the labor market for particular groups, which different government policies could alleviate. For example, they often propose child-care subsidies to encourage more parents into the labor market, or subsidies for retraining for certain groups of workers, particularly those who have been rendered unemployed from technological change. Free-market economists would usually reject such attempts to tilt the playing field towards certain work-leisure decisions and highlight the deadweight costs of the taxation ultimately required to finance such programs.

The desirability of “full employment” debate

Third, economists argue over whether “full employment” should be an explicit aim of government policy.

Technically, governments could get everyone into work if they employed all out-of-work people on public works projects at high enough wages. But free-market economists would point out that these sorts of make work schemes and extensive subsidies would tend to harm overall prosperity and crowd out private jobs.

Sure, governments can “create jobs” – you could always put everyone to work in some capacity through getting people to pick up litter (think of Milton Friedman’s famous example of giving canal building workers spoons instead of shovels to create more jobs). But what delivers prosperity over time is the process of value creation in markets delivering jobs that serve our ever-changing wants and needs. Putting everyone in some form of useless work undermines this process of wealth creation, as Steve Horwitz explains here.

Again, economists on the progressive and socialist left often appear to reject this way of thinking. Instead they often talk about “full employment” as if it should be the primary aim of policy, so advocating for job guarantees or public works, as if these are perfect substitutes for private sector roles, particularly during downturns.

The macroeconomic debate

Finally, economists argue over what is needed to achieve “full employment” from a macroeconomic perspective and whether targeting it is a sensible goal. The term became re-popularized during the debates about “austerity vs. stimulus” after the Great Recession. Sometimes it is just a synonym for the economy running hot at its potential.

Certain economists argued that policymakers were too pessimistic about the true “natural rate” of unemployment, or at least the closely related concept of the NAIRU (the non-accelerating inflation rate of unemployment) after the financial crisis. They thought that a belief that there was a high structural unemployment was becoming a self-fulfilling prophecy, because the fear of generating inflation from pushing unemployment below the NAIRU was causing policymakers to hold back on macroeconomic stimulus. With just more government borrowing not offset by the Fed, these economists believed government could achieve full employment faster.

That, of course, relies on fiscal and monetary policy actually being successful in achieving this goal. Some economists would cite the 1970s example as showing it is naïve to believe you can run the economy hot until you see inflation rising, because at that stage it is difficult to keep a lid on it. In other words, underestimating the NAIRU can be just as much of a problem as overestimating it. That’s why a lot of monetary economists, including my colleague George Selgin, believe that NGDP level targeting is a good way of avoiding both errors, because that regime negates the need to think about targeting employment at all.

The views of Biden’s CEA

So where do Biden’s nominees fall on these questions? It’s clear from public musings that they generally hold an economic understanding of “full employment.” Cecilia Rouse’s work has focused more on the barriers to a higher level of employment—what might be deemed supply-side explanations for unemployment, such as poor education and regulatory barriers.

Jared Bernstein has been more of a demand-sider, explicitly talking about a full employment goal as a macroeconomic aim. He has been the most prolific in suggesting that policymakers were too pessimistic about the natural rate of unemployment post-financial crisis, arguing that the unemployment rate did not sufficiently reflect underemployment or that many people had given up looking for work. The labor market strength since then suggests that he was correct in that analysis.

In terms of policy, however, the nominees are much more likely to think interventionist government is the route to a more expansive level of employment than libertarians—pushing, in particular, for child-care policies to lower the natural rate and being committed to a very expansionary macroeconomic policy.

A lot of Bernstein’s work in particular seems predicated on the idea that the federal government should target “full employment” as a sort of moral duty. Yet, given Biden’s campaign’s position on the need for more regulation of the gig economy and these economists’ commitment to a $15 minimum wage—which most economists would acknowledge at least risks jobs in low productivity areas of the country—one cannot say that raising employment levels is a consistent goal underpinning the whole Biden policy platform.

Indeed, given something near full employment was achieved in 2019 through a policy mix that Bernstein and the other nominees do not favor, it is not clear why these candidates should be considered “full employment” advocates any more than the Trump White House has been. Rather than outcomes, what the label is really referencing here, I suspect, is the intention to use active government policy to attempt to achieve the goal.

Bernstein has wanted to run macroeconomic policy hot in targeting “full employment” for a long time. In a 2013 book with Dean Baker, for example, he defined “full employment” in macroeconomic terms as a goal to get to a level of employment (hours and jobs) whereby further increases in aggregate demand would not increase employment.

That particular definition, aiming to get to a place where pumping in additional money had no impact at all on employment levels, is an extraordinarily expansive one that would soon hit diminishing returns, with the ever-growing threat of more inflation resulting from trying to push unemployment below its natural rate.

I commented at the time of the publication of Joe Biden’s campaign policy agenda that the labor market policies were receiving insufficient attention. Not only was there a commitment to a $15 federal minimum wage, as well as a desire for something akin to the AB5 California law affecting the gig economy, but the proposals contained a lot of pro-union policies, such as having the federal government effectively preempt right-to-work laws. Combined, these represented a huge overhaul of U.S. employment policy.

It’s not a surprise then that Biden’s CEA is dominated by labor market economists. But given the jobs market was an area of clear economic strength prior to COVID-19, particularly relative to other countries, it will be interesting to see how this purported commitment to “full employment” manifests itself over time.

_____________

Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.

Sincerely,

Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733

Williams with Sowell – Minimum Wage

Thomas Sowell

Thomas Sowell – Reducing Black Unemployment

By WALTER WILLIAMS

—-

Ronald Reagan with Milton Friedman
Milton Friedman The Power of the Market 2-5
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