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Thursday, September 1, 2011

Labor Is Not Fungible

Here is an insightful comment left at a Marginal Revolution post about studies that explain why the Obama stimulus program was not a good way to create jobs. (Almost half the hires were already working.) The commenter drives home an essential difference between the Austrian and other approaches to economics: aggregates conceal what matters, and neither labor nor physical resources are fungible.

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?

HT: Steven Horwitz

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.