Monday, November 16, 2009

The New Deal 2.0: An Old Contradiction

Wow! Someone sent this article to me, and as I read it, I thought it was a joke article from The Onion. Unfortunately, it is not a joke.

The web site, called The New Deal 2.0, appears to put out policy papers that harken back to the halcyon days of the disastrous FDR administration, i.e., they call for government intervention based on flawed and easily debunked economic logic that, if implemented, would exacerbate the very problems they seek to cure.

In this particular paper, Dean Baker argues for a New Deal-like program to reduce unemployment. What is this self-described "Braintruster's" solution?

Simple - pay people to work less hours.

And why, pray tell, would you pay people to work less hours?

According to Mr. Baker, the plan, dubbed "work-share", involves paying people the same amount of money while working less hours. Then, and here is the magic, since people are staying home one day a week (or whatever amount of time the Brain Trust decrees), businesses will have to hire more people to get the same amount of work done! Voila! Bravo!

Uh, wait. Dumb question: if employers have to pay more to get the same amount of work done, won't that just increase their costs, reduce their profit, and destroy the business? Don't worry, The Brain Trust thought of that. Quoting Mr. Baker:

The government can give them [the business] a tax credit of up to $3,000 to shorten their workers’ hours while leaving their pay unchanged. The reduction in hours can take the form of paid sick days, paid family leave, shorter workweeks or longer vacations. The employer can choose the method that is best for her workers and the workplace.

In fact, he regards this plan as "cheap":

If take-home pay is left unchanged as a result of the credit, then demand should be left unchanged. If workers are putting in fewer hours and demand is unchanged, then employers will need to hire more workers.

This logic is as simple as it gets. The process is also quick and cheap. In principle, the government can go this route to save jobs at a cost of a bit more than $20,000 per job - far less than the cost per job saved through the stimulus package.

So, in principle, if he is right, why not just pay everyone to stay home virtually all the time - maybe each person works 10 minutes per week. That would create massive employment, right?

There is only one problem. Mr. Baker seems to forget that the government robs money from individuals to pay for such programs! In fact, this proposal is the poster child for The Broken Window Fallacy which we have debunked so many times [1, 2] it practically hurts me to type the words.

In other words, the government takes money from A (taxpayer) and gives it to B (business). B now has the money, but A does not. B can spend it, but A can not. Ergo, in aggregate, nothing has happened except a redistribution of wealth - a redistribution that is at best a zero-sum game and, in fact, profoundly destructive as it distorts the flow of capital from more productive uses.

In fact, such a program is simply a form of welfare. It would enable people to receive money they have not earned and grant to some the pseudo-title of "employed". It would be simpler for the government to just send these people cash than engage in this absurd ruse.

If this self-described Brain Trust truly wants to reduce unemployment, they should stop searching for free lunches and instead, read the works of Ludwig Von Mises and Ayn Rand and advocate for individual rights and laissez-faire capitalism.


Stephen said...

Doug, Mr. Baker - to put his plan in a word - has recommended that we follow the example of Greece and Italy; shorther hours and early retirement guarantees higher employment.

Doug Reich said...


ha, exactly, that's working out great for them!

And, when you think about it, you don't even have to look to Italy and Greece. Pro-union legislation, regulation, and minimum wage laws already force people to work less, i.e, drive up the price of employment, which is doing wonderful things to our unemployment rate!

One of these days, the "braintrust" will come up with a way to overthrow the nature of reality. Just need more funding.