Dr. Blinder: Princeton Economics Does Not Add Up

An earlier version of this article appeared on American Thinker today.

Dr. Alan Blinder, Professor of Economics at Princeton and former vice chairman of the  Federal Reserve Board (amongst many other prestigious accomplishments), had an editorial on November 16 in the Wall Street Journal entitled “How Washington Can Create Jobs.”  The editorial is a typical example of the Keynesian and Statist mentality that most economists have toward job creation. It may also be Exhibit A as to why good economists should not be involved in politics:

“… it is very dangerous for an economist to seek fame and fortune and to work closely with political establishments, … the most important trait of a good economist is the courage to say the unpopular thing. If you value your position and privileges more than truth, you will say what people want to hear rather than what needs to be said.” Llewellyn H. Rockwell Jr.

In the editorial Dr. Blinder arbitrarily sets a spending budget of $30 billion for new jobs and then explores two different alternatives. First, he suggests hiring 1.0 million new government employees at a cost of $30,000 per hire. Second, he suggests using a “tax credit” for private industry for newly hired employees that would effectively lower the wage costs for new employees by an estimated 10%. He estimates this plan, using econometric estimates based on job elasticities, to create “… about 5.5 million net new jobs …”

His own figures reveal the economically correct answer as to which alternative to select. The “tax credit” alternative produces 5.5 times as many jobs as the government hiring program. Furthermore, they will be real jobs, rather than mostly make-work jobs. Yet, he chooses the government hiring program, apparently blinded by the ideology that more government is better. His rationale for rejecting the tax incentive plan is that employers would engage in behavior that he describes as “gaming the system.” All governmental interventions, including his alternative plan of government hiring new employees, are plagued by such costs and unintended consequences.

Let’s use Dr. Blinder’s own numbers to show why his choice appears ideological. Accepting his econometrics (simple historical statistical relationships), “a 10% reduction in after-tax wage costs… should boost employment by roughly 4%.” Suppose 5.5 million real jobs were produced, but 7.5 million were claimed, nearly a 40% overstatement of reality. The “gaming costs” would be the 2.0 million jobs not actually created. The government would pay $42 billion when it should have paid about $30 billion. This gaming cost is equal to about $12 billion. A similar gaming calculation for the program that Dr. Blinder recommends could also be done. We saw how easy it was to fudge “jobs saved” recently.

While Dr. Blinder expressed great concern in his editorial for the unemployment problem in this country, he rejects a proposal that he says would create 5.5 million jobs in the private sector for one that would create 1.0 million in the public sector. Yes, the first one costs more, but those costs could be somewhat mitigated via monitoring as Dr. Blinder suggests.

Regardless, Dr. Blinder’s preferred public sector choice would reduce unemployment from 10.2% to about 9.5%. The rejected “tax credit” plan would reduce the unemployment rate to 6.2%, per his own numbers. Either ideology or lack of math skills seems to be at work here. Dr. Blinder’s continued support for minimum wage legislation would suggest that it is ideology. Supporting raising the minimum wage is a vote for increased unemployment of the poorest segment of society. His own econometric data tell him that.

• FED Bunkum
• Rolfe Winkler: Case for Gold
• Thanks American Thinker (and Dr. Blinder)