The Stimulus Projects Were Also not Skill-ready

Steven Horwitz

My new favorite commenter dhanson wrote in the thread on Chait, my emphasis:

And if we're talking about a large stimulus project like HSR or wind farms or new bridge projects, those initial phases employing high-valued people can last years, not weeks or months. By the time you're at the point where you can hire large quantities of lower-skilled labor, you'd hope that the recession will either be over or you're in a balance sheet recession or other restructuring recession that will last a long time, and for which Keynesian stimulus is probably not appropriate in the first place.

This is a terrific observation.  All the talk about having "shovel-ready" stimulus projects overlooks the question of whether the human capital of the unemployed would match with the human capital required to get those projects going.  Even if they were "ready for shovels" (which Obama has admitted they were not), the question of whether they were ready for the relevant, specific human capital was one that I don't recall ever being asked by the supporters of the stimulus.  Again, if labor is not perfectly fungible, then it matters what sorts of human capital is required for stimulus jobs and at what point in the multi-period production process those complementary factors are required.

Human and physical capital are multi-specific and production processes take time:  Austrian economics 101.

I can't emphasize enough how much an Austrian view of the multiple (though neither infinite nor perfect) specificity of human and physical capital matters for understanding the operation of real-world economies.  Only in a world where both capital and labor are akin to shmoo (or play-dough) can one assume that stimulus projects are shovel-ready or skill-ready.  Once you understand and take seriously the heterogeneity and specificity of human and physical capital, then you can grasp why stimulus spending was unlikely to do any good and perhaps do much harm. 

Comments

[Troy Camplin]

This is one of the necessary outcomes of specialization. The more specialized, the harder it is to replace those people. On the flip side, it can also be harder to even find a job. Both sides have to widen their searches considerably to find one another. Coordination becomes increasingly difficult. And misallocations and redirections only contribute to the problems.

One could become very wealthy if one could solve this problem. Fortunately, the existence of the internet makes such a solution possible. We need much smarter ways of matching human capital with good positions.

[Bill]

The real world lives in a Hayekain triangle, while the political class lives on a pie chart.

[J Oxman]

dhanson is my hero!

Something else to keep in mind, especially if we are talking new projects, is the regulatory burden. How many permits are required, is there land use applications to go through, is the EPA involved...all that stuff. Frankly, by the time you get a pipeline approved, you could be past the current recession and into a new one.

[Martin]

"Once you understand and take seriously the heterogeneity and specificity of human and physical capital, then you can grasp why stimulus spending was unlikely to do any good and perhaps do much harm."

Steve, I have trouble seeing how this argument addresses the Keynesian argument. As I understand the Keynesian argument is that, because monetary policy is impotent, fiscal policy is all that remains to offset the excess demand for money.

I understand that it is destructive, and it dislocates people, as does inflation, but I find the argument that you get a low ROI or that projects are not shovel ready unconvincing. That seems to me to be more of a public finance argument. As long as the money is spend and spend again, I don't see why this is relevant.

Unless of course I am reading you wrong and you mean that even if Keynesian theory is true, the money can't get spend fast enough because labor and capital is not play-dough. Then again a possible counter to this would be that the gov't would just cut all the taxes on the lower/middle class and give them some money to boot as that category has the highest MPC.

[McKinney]

Here's a related comment from The Economist's blog, Free Exchange:

KACEY1 wrote:
Sep 2nd 2011 4:13 GMT

My son wanted to open a small business, so he registered a company.

Few weeks later, the state of California sent lots of paperwork and forms to fill, shortly after that paperwork, the Franchaise Tax Board sent more forms, asking how many people do you hired, how much sales, pages after pages.....

My son did not make a penny, but, spent lots of time to fill the forms.... So, he told the Franchase Tax Board that he closed his business.....

But, the paperwork continues for months after months..... All kind of inspectors stop-by to inspect his non-existed business....

This is the environment of business condition in California....

http://www.economist.com/blogs/freeexchange/2011/09/americas-jobs-report#comments

[McKinney]

We need to keep in mind what Hayek wrote about labor being dependent upon capital, too. The problems aren't just the specificity of labor and capital, but the modern dependence on capital for labor to be useful.

The President may want to boost work in infrastructure, but today such work requires very expensive equipment, such as earth movers and cranes.

This isn't the 1930's when you could hire a lot of excess farm labor in the summers and move dirt with shovels and wheel barrows.

If the capital equipment for infrastructure work isn't available, it makes no sense to hire laborers. In time, the equipment will get made and the workers hired, but it could take years to ramp up.

[Allan Walstad]

That a dollar is spent and spent again is no magic potion for economic recovery and growth. It depends what it's being spent on. What matters is for labor and capital to combine in an effective structure of production. If the structure of production has become warped (probably by previous government intervention), government intervention cannot restore it or else government could command the sort of information that would make socialism work. So the interventions must stop. Monetary manipulations must stop. "Stimulus" spending must stop. The significance of the comments by Dhanson lies in the examples of "stimulus" spending further warping the structure of production, drawing talent from where it was allocated by the market to where government spending directs it.