Sorry Jonathan Chait, but Labor is NOT Fungible; or Best Blog Comment I Read Today
The Mercatus studies that Tyler wrote about this morning have received quite a bit of harsh criticism, especially from the left, including this Jonathan Chait piece at TNR. Chait argues that the study misses the point that "labor is fungible." The Garret Jones & Dan Rothschild study shows that 58% of workers hired by the stimulus spending were already employed elsewhere, suggesting that "job creation" is not a good proxy for "increase in net employment." Chait's response can be summarized as "well if those 58% of workers left other jobs to take stimulus-funded ones, surely their previous employers would now be able to hire a worker to fill their spot, thus there is a big increase in net employment even if the stimulus-funded jobs go to the already-employed."
Chait's assumption of the fungibility of labor is the key. His argument presumes that labor can easily be substituted in this way and that the human capital of those workers hired for stimulus-funded projects is the same as those in the unemployment lines. That's the only way that the unemployed person could be swapped in when the stimulus-funded worker is bid away. From an Austrian perspective, human capital, like physical capital, is most emphatically not fungible and is heterogeneous in use. Thus there's no reason to believe that the unemployed workers would be a substitute for the bid-away worker. Workers, like physical capital, have to fit into the jigsaw puzzle. Their human capital must be complimentary to the human and physical capital in the firms where the labor has left.
This is particularly true when we recognize the way in which the boom of the 2000s also distorted the structure of human capital across the economy. It may well be that the currently unemployed are examples of human capital malinvestment and that they will have to "refit" themselves in order to find work in the post-recession economy.
If you don't believe me, check out this comment at Marginal Revolution from someone in the middle of all of this who makes this argument with real-world experience I cannot match (my emphasis):
Dhanson August 31, 2011 at 4:17 pm
Those of us who actually work in industry and are involved in large engineering projects of the type the stimulus was designed to ‘stimulate’ could have told you this without waiting for a study. We tried to. No one was listening.
It is maddening to hear ‘workers’ talked about as if they are interchangeable – Oh, a whole bunch of home construction workers have been layed off? Don’t worry, we’ll build a road or a bridge and employ them!” The only problem being that the type of construction home builders are trained for has nothing to do with bridges. Perhaps people like those in the Obama administration lack the appreciation for the real complexity of these jobs and assume that any blue collar work is trivial and interchangeable with a little retraining, but it’s not the case.
Not only that, but the people who can *start a project are very different than the people needed to bring it to completion, and in general the people needed at the beginning of a project are the least likely to be unemployed. In fact, even in a recession there is a shortage of such people. So it was predictable as rain that new stimulus projects would have to scavenge project leaders, architects, managers, and senior engineers from other existing projects that may have more value. It was absolutely, 100% unavoidable.
Not only that, but it is incredibly destructive: Pulling a manager from an existing project can cause damages far exceeding the salary of that person. If a project manager or architect is enticed away from a project that has a $100,000 per day development cost, and his leaving causes a month of delays while a new manager is found and brought up to speed, that’s a cost that will never show up in the stimulus accounting – but his $150,000 job will be counted as a ‘job created’. No one will know that in addition to the stimulus money used to hire him, the real cost of that job was an additional $3 million dollars. I’ve never seen a single Keynesian model take that kind of destruction of existing projects into account or try to quantify the effect. You’d think this might be important to consider – especially in an era where specialization is so important, where even low-level positions require specialized training.
It was also inevitable that some of the people hired would be pulled out of retirement – when you need top guys, you’re not going to find them in the unemployment line. You’ll find them sitting on their sailboats in the Carribbean.
No one but the Austrians seems to care about the actual fine structure of the economy, and the effect a barrage of government money might have on it. None of the people driving policy seem to have an understanding of just how long and complex supply chains are, how fragile they can be, and what it does to a company to pull key people out of existing projects because they were enticed away by stimulus programs.
My company has hundreds of job openings. OUr inability to fill them has nothing to do with aggregate demand – we simply can’t find the kinds of people we need. The bad incentives baked into this economy for the past two decades have diverted the workforce into non-productive areas. It’s pushed people out of science and engineering and into finance and law. The bloated housing sector attracted people away from computers and electronics into carpentry and plumbing. We’ve distorted our labor pool, over-built in numerous industries while leaving chronic shortages in others. Easy access to student loans and easy, long-term repayment has disconnected the choices of students for school and faculty from the economic needs of the country. All of these problems are completely masked by focusing on aggregates.
Let me ask a simple question: If your productive capacity is totally focused on making tables, but your population has plenty of tables but has a real shortage of chairs, and no one is trained to make chairs, how much fiscal stimulus would you need to pick up aggregate demand? Answer: Infinite. People don’t want more tables at any price. As long as that’s all you’re offering, aggregate demand will remain low, and all your table makers will remain unemployed. In fact, the stimulus is just masking the problem and delaying the necessary adjustment to a ‘chair economy’.
Aggregate demand may be way down, but Apple has no problem selling every iPad it makes.
I guess maybe in the past, in a simpler time with simpler labor requirements, you could get away with assuming that the law of large numbers would apply and labor could be treated the same. Who says that’s still the case?
As Garett Jones said of that comment: +1. I might go +100. And this is why capital theory is what ultimately distinguishes the Austrian understanding of market economies and boom and bust from all of the alternatives.