by Mario Rizzo
Richard Ebeling, as usual, does an excellent job of showing how the inability to see macroeconomic phenomena as the outcome of complex micro-processes leads to poor policy prescriptions. Take a look at his response, at EconomicPolicyJournal.com edited by Richard Wenzel, to a post by Tyler Cowen at Marginal Revolution. The upshot is that the subsidization of employment during a recession is a bad idea.
ThinkMarkets 
That really is an excellent response. Ebeling is undoubtedly a great wordsmith and an excellent clarifier of economic science. I only wish I were capable of writing with such simplicity and precision on these matters!
However, on a critical note, Ebeling’s criticism may be somewhat unfair. Is Cowen really commiting the aggregation fallacy?
Cowen has called for more expansionary montary policy, because, whatever may have caused the housing bubble, he believes we currently have a different type of monetary distortion — an excess demand for money. From reading his blog, I suspect Cowen sees malinvestment merely precipitating tight monetary policy, and it is this latter fact which has made the recession unusually deep and long.
What weight one places on these two factors is very important, because in the case that unemployment has primarily been caused by an excess demand for money, there has been little “misallocation of the factors of production among those sectors and ‘production stages’ of the market.” When the monetary distortion is finally ironed out, most of the unemployed (or “idle”) resources will be redeployed exactly as before.
The matter is empirical — to what degree is unemployment the cause of these two factors? In the case that an excess demand for money is the primary culprit, the government could do a lot worse than providing incentives for people to stay in their jobs.
Now I hope Cowen reads this and tells me exactly how I misrepresented his argument.
Factor complementarity is very important in understanding Hayek and his differences with Keynes. Hayek’s “Investment that Raises the Demand for Capital” articulates capital complementarity clearly.
Lee,
To be fair, *I* titled this post “Perils of Macro Aggregation.”
Mario,
I didn’t mean to accuse you of anything. Richard’s post was really excellent, but its applicability to the present situation seems to depend on implicit assumptions which I suspect Cowen disagrees with. In this case, I do not think either Ebeling nor Cowen are arguing falliciously, but rather assume different initial conditions in their arguments.
Yes, this is a good response. Keynes entitled chap. 16 of The General Theory something like “Sundry Observations on the Nature of Capital,” suggesting that capital (and the theory of capital) was not much more than a footnote to the theory of money.
Well, one of them is right about the initial conditions and, thus, is right in his prescription. One can make perfectly logical arguments from false premises and thus come to absolutely incorrect conclusions. That’s what matters. And this is assuming the best regarding the logic used.
As a friend pointed out, espousing the State soes, however, mean you get invited to ALL the best places.
http://www.marginalrevolution.com/marginalrevolution/2010/08/afternoon-at-the-treasury.html
Even if you do have to indulge in a little sycophancy toward your hosts, as a quid pro quo:-
‘The best question of the day came from Tyler. The discussion was on the financial reform bill and how it changed the incentives of players in the financial industry by creating more risk for them. Tyler interrupted with “What I really want to know is how your incentives have been changed! What is to say that next time the decision will not be made to again bailout the bondholders?”’
‘As Tyler said after an earlier visit, Geithner is smart and deep. Geithner took questions on any topic. Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press. Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact. We went way over scheduled time. He seemed to be having fun.’
Yuk!
Sycophancy indeed, which is one of his trademarks. The WSJ had a profile of Geithner a couple years ago stating that he’s worked his entire career in government.
If that’s true, he’s never actaully worked a day in his life, defining work not like a physicist would. But then I don’t believe in the labor theory of value either.
From today’s NYT:-
WASHINGTON — Treasury Secretary Timothy F. Geithner, kicking off a half-day conference on housing finance, said Tuesday that it was important for the federal government to continue guaranteeing mortgage loans.
He said continued government support was important “to make sure that Americans can borrow at reasonable interest rates to buy a house even in a downturn.” The absence of such support, Mr. Geithner said, would make future recessions more severe because private lenders would not provide enough money for loans.
HMMM! THat sure sounds Smart and Deep to me, Mr. Cowne
Just a heads up: I believe it is Robert, not Richard Wenzel.
Here’s a little disaggregation for you at http://delong.typepad.com/sdj/2010/08/identifying-cyclical-vs-structural-unemployment-a-guide-for-slate-writers.html
Delong doesn’t take it down to the firm level, but, given the sectoral statistics, it seems hard to deny that demand weak across the board.
I’d be interested in disaggregating coal from lumber – those are two very different industries. Why would lumber production be going up with housing starts down?
Troy, Just a guess, but the increase in lumber production may be due to exports.
Possibly. I’d still disaggregate two such completely different industries, though.