Demand Stimulus And Pro-Growth Structural Reform Are Two Great Tastes That Taste Great Together

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One of the persistent divides in the policy community is between the majority view that demand-side stimulus is some kind of “sugar” that helps countries “paper-over” more fundamental problems, and the correct view that inadequate demand is itself a major barrier to adopting pro-growth reforms. A great example of why Adam Posen and I are right about this is Dana Goldstein’s piece noting that the American Jobs Act features a sharp rhetorical u-turn from the Obama administration away from its teacher quality agenda.

This happens because efficiency-enhancing reforms look totally different in situations of mass unemployment.

Flash back to the spring of 2007 when the unemployment rate was below five percent. It was still the case back then that the American economy had been suffering from 30 years of disappointing wage and income growth, driven in part by stagnating educational achievement. At that time a teacher quality agenda seemed very compelling. If switching some people out of the teaching profession and into something else while switching other people in caused a bit of frictional joblessness, nobody thought that would be a huge macro problem. Indeed, even if a teacher quality agenda led to a net decrease in the overall quantity of teachers, there was no reason to think that would be a devastating “demand shock” to the local economy or that ex-teachers would have much trouble finding new positions. The kind of teacher quality agenda that the Obama administration (and CAP) supports was of course controversial but it was controversial as education policy. The question at hand was “will this make schools better over the long term” not “will this stabilize the macroeconomy.” Introduce severe macroeconomic distress into the picture, and the quality agenda tends to take a back seat.

And outside the public sector realm, things actually look worse. For two years now, all I hear from any critics of anything is “job-killing this, job killing that.” But over the long-term, killing jobs is the only reliable path to prosperity. We take the things that are already being done, and invent ways to do those things with less labor power. That frees up new people to do new things, thus increasing our overall stock of goods and services. Once upon a time the majority of Americans did constant back-breaking agricultural labor in order to feed the country. Today, a much smaller number of people work less hard to feed a larger population. That’s an epic series of job-killing innovations, but it’s also the road to prosperity. Yet it’s only under conditions of labor scarcity—full employment, adequate demand—that either policymakers or entrepreneurs are properly incentivized to spend their time thinking about becoming more efficient in their use of labor.