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Spengler

Obama will get an economic recovery when demand curves slope upwards

August 31st, 2011 - 2:19 pm

Mark Perry’s excellent Carpe Diem blog rehearses the miserable track record of President Obama’s new designee for chairman of the Council of Economic Advisors, Prof. Alan Krueger of Princeton. Back in 1994, after New Jersey raised its minimum wage to $5.05 an hour from $4.25, Krueger (with economist David Card) published a paper claiming that the higher cost of labor led to more rather than less hiring at New Jersey fast food restaurants. Demand curves, as Perry observes, slope downward on this planet (if something costs more, people buy less of it, including labor). But on Planet Krueger, demand curves slope upward, by magic.

Card and Krueger proudly announced the repeal of the most fundamental law of economics: “Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants increased employment by 13 percent.” Except they didn’t. Their data, gathered by telephone survey, turned out to be “so bad that no credible conclusions can be drawn,” another study concluded. Other economists used actual payroll data instead of a phone survey and found just the opposite: the state-mandated pay hike reduced employment.

“Let’s hope that labor economist Alan Krueger, as he assumes his new position as Chief Economist to the President, remembers that demand curves really do slope downward,” Perry concludes.

Once again, it appears that Obama has hired the best incompetence that money can buy. Larry Summers may have one of the highest IQ’s on record, but he believes that the mathematical models which which he plays so cannily have something to do with the real world in which investors lose sleep over risk, entrepreneurs lose sleep over making the payroll, and large-company executives lose sleep over making their numbers.

Large corporations who already have health care plans, and have serried ranks of lawyers to deal with the regulators, are doing very well, in fact. S&P 500 corporations increased employment by 10% over the past year while overall employment was flat. Start-ups who have to deal with Obamacare and the rest of the Washington regulatory burden can’t get over the threshold. Remove the obstacles and let Americans do what they do best and the economy will recover.

 

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