The Filter^: Another Austrian kick up the arse of Paul Krugman

Krugman writes:

There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs.
Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs?

Greg Mankiw responds with the convention answer: Ricardian equivalence and incentives for future investment. The distinctly Austrian response is to ask in a bit more detail about the nature of these jobs. No one denies that paying people to dig holes has the potential to increase economic activity (although multipliers aren't always greater than 1), but this just begs the question: what is the goal?

Krugman's assumption is that we just need people doing *stuff*, and once the economy recovers they will move into socially productive jobs. At the moment there's dead weight loss, and a fiscal stimulus will restart the engine of the economy and ultimately lead to people moving into those industries that are below capacity. But of course if labour markets are so flexible that all these idle resources can move into unproductive labour and then subsequently on to productive labour, would we be having a recession in the first place? Doesn't the Keynesian argument rely on an assumption that over time labour markets are pretty flexible? If labour markets aren't flexible, it's hard to see that these hole-diggers will easily find jobs in the recovered economy.

Remember, the tragedy of the mines/docks/etc wasn't that so many of them were shut down, it's that for so long they received artificial support that induced young people to go into those industries and resulted in whole communities becoming dependent upon them.

Notice the irony here - Austrians often get accused of having utopian assumptions about the flexibility of markets. But in reality these structural rigidities tie directly into arguments about the heterogeneity of capital. Public works may create jobs, but what type of jobs? And what's to say that if you artificially create a phantom job, that won't create a dependency and lead to greater long term problems?

Krugman finishes up by talking with this:

So shouldn’t that be our response to all that idle corporate cash?

In the real world there are no idle resources. "Idle" implies no opportunity cost. No opportunity cost implies post-scarcity. Post-scarcity is not economics. If companies are sitting on liquid assets it's because they have a demand for liquid assets. This is important, useful market information. It's a signal that allows us as observers to understand more about how the economy is functioning. Krugman's policy is akin to confiscating the lifeboats from a cruiser because they weigh it down, and then declaring that because there's no lifeboats on board it must mean that everyone is safe!