Over at Angry Bear, Ken Houghton recommends Steve Randy Waldman saying that economists of the liberal-technocrat school shouldn’t too-hastily dismiss Austrian-style “hangover theory,” and in the event you happen upon this but not Ken’s post, so do I. Waldman:
Austrian-ish “hangover theory” claims, plausibly, that if for some reason the economy has been geared to production that was feasible and highly valued in previous periods, but which now is no longer feasible or highly valued, there will be a slump in production. It wisely asks us to consider not only the prosperity we measure today, but the sustainability of that prosperity going forward…The Austrians focus on unsustainable arrangements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income. I think both approaches are fruitful.
Grant that “real capital” may include human capital and there’s a sense in which, say, the idea that some of our unemployment is structural is not totally wrong: marginally competent house-construction laborers and housing-finance paper-pushers had their bullshit jobs in the middle of the zilches thanks to the housing bubble, and are not liable to return to similar jobs unless someone stupidly reinflates that bubble. This doesn’t mean that the liberal technocrats are wrong to point out that a lot of other unemployment is collateral damage to the bubble deflation.
I have one other nit to pick: Waldman decries “vulgar” make-work Keynesianism as a dead-end, observing that “effort is not production.” That’s true enough, but it’s important to remember that there are worse things than paying someone to dig a hole and fill it back in — what the Econ 101 student might take as the gold standard of useless make-work. In fact, we can (and do) pay people to dig a hole, fill it with something valuable, set the contents on fire, and then not fill the hole back in. (I’m looking at you, Afghanistan!) If anything, the stimulus spending via ARRA has avoided make-work to a fault, a bug in the original concept that may be a feature — as long as Chris Christie’s army doesn’t pass up too much free money — both for dragging out the actual spending and for leaving behind actual valuable public capital.