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Fallacies Of Composition

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"Fallacies Of Composition"

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Kevin Durant plays in the NBA and you don’t because Kevin Durant is better at playing basketball than you are. If you radically improved your basketball skills, your chances of getting hired by an NBA team would skyrocket. But it doesn’t follow from this that if every American improved his basketball skills by 10 percent that we’d have 10 percent more NBA players. And even if an increase in the skill level did induce the NBA to expand, it really doesn’t follow that we’d have more employment overall. A new franchise in Kansas City might simply put downward pressure on other Kansas City entertainment options.

I think I see a lot of this same kind of reasoning involved in the European establishment’s thinking. The idea seems to be that if economic restructuring in Estonia has allowed Estonia to capture a larger share of the EU market and lead to output growth in Estonia, that everyone needs to “go Estonian” and their problems will be solved. But that’s not right. Kevin Durant is competing against other people for a finite number of NBA jobs. European countries undergoing “internal devaluation” are competing against other countries for a finite pool of European demand. That one country can succeed by doing internal devaluation or other restructuring faster than other countries doesn’t tell us anything about what would happen if everyone went faster down this path. Now if I could wave a wand and make everyone 10 percent better at basketball I’d do it. It seems like there would be benefits and no discernible downside. I give a hearty thumbs up to people who think the Italian economy is saddled by crazy rules (look up their pharmacy regulations sometime) that should be changed. But in a world of excess capacity, it’s odd to think of improving efficiency as an alternative to providing adequate demand.

I sometimes think macroeconomic policymakers are in the grips of a theory that goes like this: Voters will never swallow pro-growth structural reforms as long as they’re fat & happy, so we need to keep our boot on their necks until they relent. Not only is this ethically odd, I know of no empirical support for the view that it works, and it doesn’t really make any sense. The case, on the merits, for efficiency enhancing reform gets much stronger when you don’t have excess capacity. Mass unemployment makes every labor-saving innovation look like a job-killer instead of an output-enhancer.

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