Belmont Club

Wires Crossed

Guy Sorman at the City Journal looks at the question of restoring economic confidence. Reviewing Paul Krugman’s book End This Depression Now!, Sorman examine the Nobel Prize winning economist’s — now turned pundit — argument that confidence can be restored by injecting a stimulus of government spending into the economy. Such a jolt would send a signal to producers and consumers: happy days are here again. Since the only thing to fear is fear itself, once the pump was primed the mechanism would keep on going and the economic downturn would be over.

“‘Ending the depression should be incredibly easy,’ Krugman asserts. The government must simply spend more, because the American consumer is spending less. Borrowing from Keynes, Krugman argues that the crisis, having been provoked by a decline in private demand, can only be solved by an increase in public demand.” The maneuver crucially depended on sending a signal to the market to both produce and consume.

But what if, Sorman asks, the market does not receive the signal as intended? Suppose that instead of stimulating production and demand the Keynesian spending had the opposite effect? Nonsense, Krugman says. The trick aways works.

This inflationary solution, which Krugman calls “a feel-good experience,” has been tried before. It worked, he claims, during World War II, when arms-building programs lifted the U.S. economy out of the Great Depression. Half-jokingly, Krugman says that the threat of an alien invasion should suffice to motivate more government spending.

But the weakest link in Krugman’s argument is the assumption that the economy must interpret the signal in the way that Krugman desires. Why should this necessarily be the case? Sorman says that other distinguished economists have argued that the markets may interpret signals in a different way:

Robert Lucas, the originator of rational-expectation theory, has shown how and why consumers and entrepreneurs reject Keynesian policies: in essence, the marketplace is wiser than the government. Entrepreneurs and consumers alike understand that an increase in public demand is artificial and short-term. Consequently, public demand leads not to increased consumption or investments but to price hikes.

In other words, the market has a mind of its own.  Suppose the market observes policymakers taking Krugman’s advice to spend furiously to prepare for an invasion of space aliens. But instead of building factories to manufacture Acme Electro Atomizer Ray Guns and sparking a boom — as Krugman predicts — the public concludes that the administration and all its economic advisers have gone completely insane. Instead of anticipating a boom they cut back on existing activity and withdraw into an economic shell to ride out the storm.

Could such a thing actually happen? Events in the Eurozone would seem to suggest that EU “bailouts”, rather than increasing market confidence, can undermine it.

But let us take a more prosaic example.  For instance, the governement signal that unemployed people must be helped to find jobs.   In order to advance that laudable goal “in April, the Equal Employment Opportunity Commission signaled that it would begin to crack down on employers who use the criminal histories of job applicants to discriminate against them illegally.”  What a capital idea. But the New York Times noted that not employers were enthusiastic about changing their existing hiring policies.

To judge from conversations with business owners, labor lawyers and human resources consultants, many small businesses had no idea there was anything wrong with practices like a blanket ban on hiring anybody with a criminal record.

Who would ever think such a thing? Especially since as the NYT points out,  the ‘anti-discriminatory’ rules have been on the books for ages although they have only recently been the subject of new implementing rules.

The notion that using criminal records in employment decisions could constitute discrimination has been government policy since at least the 1970s. The E.E.O.C. has in the past issued policy statements, called enforcement guidance, about how employers may use criminal records without running afoul of the Civil Rights Act, but in April the agency published new enforcement guidance. …

In its guidance, the commission warns employers not to use arrest records at all in hiring decisions. Because “arrests are not proof of criminal conduct” — they often do not result in charges, and charges often do not lead to convictions — basing a hiring decision on an arrest record is presumptively discriminatory. (An employer can, however, investigate the conduct that led to an arrest and, according to the guidance, “make an employment decision based on the conduct underlying the arrest if the conduct makes the individual unfit for the position in question.”)

The underlying rationale for warning against using criminal records to disqualify a job applicant was apparently to prevent a “disparate impact” on African-Americans, who were often lumbered with a longer rap sheet than applicants of other ethnicity. The new regulations were intended to remove an irrelevant criminal record as a barrier to employment.

But the NYT reporters admitted that businesses were in a genuine dilemma. They were reluctant to hire people with  previous run-ins with the law because of the risk they might get sued or investigated by another branch of the government if that employee subsequently did something wrong. It was damned if you did and damned if you didn’t.

Andrea Herran, a human resources consultant in the Chicago area, said that the new procedures would subject small businesses to a legal cross-fire, especially businesses with employees who work in the field. Those companies are potentially liable for the actions of an employee in a client’s home or office.

“It’s almost like you’re being squeezed on both sides of the law,” Ms. Herran said. “If somebody’s making them nervous with their criminal history, and they’re worried about getting sued on the other side, what’s a business owner supposed to do? Most business owners are going to want to play it safe and say, ‘I’m not going to want to give the job to someone with a criminal record.’ ”

One way out of that insoluble contradiction is for even small businesses to hire lawyers to determine whether or not they can refuse to engage a particular applicant without running afoul of the EEOC regulations.  Given that any extra money will then be spent on lawyers, the end result will probably not be any new net hiring of African-Americans so much as a lucrative new field of employment for those who have been called to the bar.

Thus it turns out that messaging is not as simple as it seems.  In the EEOC case there are at least three sets of messages: the signal the EEOC purports to send; the signal the EEOC actually sends and the signal the employer actually receives. In this instance the message purportedly sent is “do not discriminate against people with criminal records”; the message actually sent is “hire African-Americans but if they screw up you are liable as an employer” and the message actually received is “hire a lawyer”.

Things don’t always work as intended. This is a cautionary tale which illustrates why Paul Krugman’s scheme to re-start the economy by preparing for an invasion of space aliens may not work as planned. The best laid plans of mice and men can often go astray. The recent arrest of a former San Francisco Human Rights Commissioner on charges of the possession of child pornography illustrate the principle that there’s always an exception to the rule, assuming one can even know what the rule is any more.

Who is going to tell small companies not to discriminate against those with criminal backgrounds when people like Human Rights Commissioners are themselves sometimes the problem? In a complex world individual initiative and discretion are invaluable. They are still the best way to tell the aliens apart from the predators, the sheep from the wolves, and good investment from malinvestment. Common sense may still play its part, if we let it.


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