Monday, July 18, 2011

More Economic Nonsense from Alan Blinder

Only last month Princeton's Alan Blinder was in the Wall Street Journal espousing discredited economic theory. On the subject of his views, and Alan Meltzer's comments thereon, I wrote,

"Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.

These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.

Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research."

Blinder was at it again last week in the same paper. This time Blinder was castigating businesspeople for not hiring, and advancing his own personal remedy involving some sort of payroll tax credit.

Sadly, he demonstrated the same, well, to use a pun, blindness to how business managers react to uncertainty. Specifically, in the face of slack or uncertain demand, they don't rush out to hire more people. Blinder couldn't seem to fathom that his model of cost-push hiring isn't how the real world operates.

Yes, for non-perishable end-use products in a grocery store, lowering the final cost will spur demand, according to conventional microeconomics.

But hiring workers to produce goods or services isn't the same thing at all. When revenue growth is in doubt, making incremental workers cheaper isn't relevant and won't affect hiring decisions.

It's more evidence of how far removed from the realities of business many economists are. And Blinder is clearly one of them.

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