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Indeed. I’d view it as employers rationally using a “signal” that comes from someone being out of the labour force at a time when it may not be appropriate. Only real policy response I can see are measures that improve information and reduce reliance on this signal.

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And I understand why we would worry about that scenario, Paul. It just seems like commonsense, really. And that should ring alarm bells 😉

Funnily enough, I took a year off work when our daughter was two – I was made redundant, thankfully, I had so little to do – so my wife returned to her job and I became a househusband. That was a truly rewarding experience! But when I started to actively seek work, the issue of outdated skills just didn’t arise and I basically got the first one I applied for.

So what I would say is yes, it could happen that way, that we end up with a lost generation of long term unemployed, but that would be a policy choice, not an inevitable event. When I was active as an employer, I worked with government agencies to hire, for example, released prisoners and the intellectually impaired, so to me, it’s something an engaged government could address .

They may employ someone but its unlikely to be one of the long-term unemployed. One worry here is that the current cyclical unemployment problems could become structural and very long-lasting.

Blair, let’s not be silly. We have plenty of headroom (thanks to Michael Cullen) for stimulus of the magnitude I’m thinking of – say 2% of GDP per year until we are out of this funk. By the way, what did happen to inflation and interest rates in China after 2009?

Here’s an interesting morsel of (boring big data) I sought out this morning that may help you understand my thinking. In the 1997 govt accounts we owed 42b, 46.5% of GDP, and the estimated interest payable was 3.1b. In the 2013 govt accounts, we owed 74b, 35.5% of GDP, and the est. interest is 3.8b. And that interest payable is decreasing with every bond tender!

My basic priors: inflation expectations are well and truly lowered over the entire ex-colonial world, sorry, advanced economies, for the foreseeable future, and global interest rates will stay low for a long, long time, end of story, until austerity has run its course.

I say, make hay while the sun shines (my old uni holiday job, now mechanised out of existence, sadly) and yes, there IS a free lunch for the brave!

By the way, Dillow pretty much dealt to Caplan.

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2013/04/on-wage-led-growth.html

The links don’t seem to work but I’m sure you will find the article 🙂

That’s easy, Paul. Stimulate aggregate demand. Employers will respond because to do so is in their rational self interest.

Yeah I think Caplan calls himself a Hayekian so you have to take some of the free market sermonising with a pinch of salt. That said, I still think there are a lot of crazy regulations (e.g. height limits on buildings, minimum parking requirements) we could safely do without. Do we have a burning need for more infrastructure? That would be a good essay topic for Matt!

Ben Bernanke’s call for fiscal stimulus is very interesting as you point out. I took this as code for “I have a lot of conservative Midwestern governors on the FOMC and don’t have the votes to to fully implement an expectations-based policy regime that I would like”. In the NZ the Governor has more power from memory so we have more key man risk than committee risk.

OK here’s one for you. What if the govt had done a China-style stimulus in 2009 – 16% of GDP? How high would inflation have been? Wouldn’t the RBNZ have raised rates massively? What would the NZD/USD have got to? I don’t know, but it does seem back in the old days, when unemployment came down very fast out of recessions, that inflation would have to run pretty hot for a while, say 5-6%. Not many central banks would allow that these days.

Hi Blair

Thanks for your reply.

I would point to an obvious difference between Japan and us in that our infrastructure is positively deficient in so many ways, from filthy streams and rivers to aging sewers in central Auckland, that we have a lot of spending to do before we have to concrete over the aforesaid streams to provide one more job!

I’m not sure of the actual definition of ‘fine tuning’ in this context, but I would hesitate to apply that term to, say, the example of the collapse of the construction industry in New Zealand – my prescription would be more blunderbuss than fine.

Your comment on OECD CBs is on the mark, and it includes ours. Our target is 1-3%. I would rather we were ducking under the odd high wave than bottom bouncing on 0.9%. If nothing else, we would feel richer!

And regarding your faith in monetary policy, I would point out that even Ben Bernanke laid down the law to the US Senate when he begged for fiscal assistance to promote demand in the economy, so if I were you, I would tend to let go of faith and look to expertise and empirical evidence. Governments can do a lot.

The link above is broken but I found Caplan’s article, courtesy of Google, that I presume you were referring to, the one on the evils of unemployment, and I was right on board till after this: “Instead of downplaying the grave evil of unemployment, we free-market economists should urge governments to redouble their efforts to fight it…regulations…minimum wage…blah, blah, blah…”

If that’s the best the free market has to offer, it may be time to dust off Das Kapital!

Cheers.