Raw Thought

by Aaron Swartz

Economic BS Detector

People are trying to lie to you. Or maybe they just don’t know what they’re talking about. Either way, you shouldn’t listen to them. But how can you tell? Here’s a guidebook of key phrases that indicate someone doesn’t know what they’re talking about when they talk about the economy:

Creates/destroys jobs. You often hear men of business saying that their company “created” 2000 new jobs. And in some sense that may be true, but it’s probably less exciting if it turned out that they did it by destroying 2000 jobs somewhere else.

The same is true for economic policy in general; it will typically create jobs in one place, but only at the expense of losing them somewhere else. That’s because the number of jobs (i.e. the unemployment rate) isn’t just a free-floating fact of life; it’s specifically controlled by the Federal Reserve.

The Federal Reserve is a cadre of bankers and economists that, among other things, meets regularly to decide interest rates. When there are too few jobs, they lower interest rates, making it easier for people to borrow money and start new companies, hiring new people and creating jobs. (The current crisis is the rare exception — interest rates are at zero and there still aren’t enough jobs. Thus the stimulus package.) When there are too many jobs, they raise interest rates, making it harder for businesses to start and expand, and cutting back on jobs.

Wait, too many jobs? The Federal Reserve worries that if unemployment gets too low, we’ll hit a cycle of accelerating inflation where prices spiral up and up. Critics argue that they actually don’t like low unemployment because then businesses have to compete for employees, which means they have to pay more and give out nicer benefits. So, critics argue, they try to leave some unemployment, so that employees are competing and can be pushed into taking lower wages.

If you really care about how many jobs there are — and obviously you should — then you shouldn’t worry about particular policies or people, whose effects either won’t matter or will be counteracted by the Fed. You should worry about the Fed and who controls it.

Helps/hurts competitiveness. Let’s face facts: America isn’t competing with anyone. Remember competition? You sell a widget for $5; I come along and sell it for $4; then you have to either lower your price or lose all your customers to me and go bankrupt.

But America isn’t going to go bankrupt. Countries don’t really do that sort of thing.

Instead, what matters for how well a country is doing is (roughly speaking) its productivity, i.e. how much stuff it makes per person-hour of work. Sometimes you can increase this productivity by working with other countries — by, for example, trading some steel for some coffee. But this is just a way to up your own country’s productivity; it has nothing to do with competition.

The competitiveness bogeyman is often trotted out when someone is trying to get you to do something you don’t want. “Oh, sure,” they say, “you may not want to do it, but the Chinese are and they’re going to eat your lunch.” It just isn’t so. Nothing will stop us from chugging along, eating our lunch just fine; even if the Chinese are eating two lunches.

Sadly, a lot of “economic commentators” don’t know what they’re talking about, so you see these phrases everywhere. Now that you know they’re bogus, it should save you a lot of time.

You should follow me on twitter here.

January 28, 2009


As much as I agree with you that claims about “creating/preserving jobs” or “competitiveness” are often dubious, some of the stuff in your post is pretty shoddy economics.

The Federal Reserve is a “cadre of wealthy bankers”? As far as I can see, of the 15 rotating members of the Federal Open Market Committee, the body that actually makes decisions on interest rates, only 4 seem to have any background in banking. The majority is made up of academic economists and business professors. This isn’t exactly the “evil guys in top hats and monocles” scenario you seem to be implying.

You also seem to be confused about the reason why the Fed tries to stabilize the economy around potential output (which in the US roughly corresponds to an unemployment rate of 5 percent). It is not because it wants to preempt any wage increases whatsoever. What it seeks to prevent is wages that rise so rapidly that inflation expectations become ‘unanchored’, a situation that would invariably lead to accelerating actual inflation. How high a rate of inflation is optimal is surely debatable (and in fact hotly debated amongst economists), but an ever-rising rate of inflation seems like a pretty bad idea to me.

posted by Tobias on January 28, 2009 #

To add to what Tobias said above: There was inflation in the late 1990s. It just wasn’t consumer price inflation, it was asset price inflation in the form of the tech/stock bubble. (Or, to paraphrase: the inflation was there, it just wasn’t evenly distributed.)

posted by Jorge on January 28, 2009 #

“The same is true for economic policy in general; it will typically create jobs in one place, but only at the expense of losing them somewhere else.” I agree. The possibility of economic policies that encourage new goods and services (not just new companies providing old goods and services) to come into existence doesn’t seem to occur to American policymakers. New companies making old things only shift jobs, as you say; new companies making new things really do create jobs.

On the other hand, the notion that “America [meaning American companies] isn’t competing with anyone” is often false. Detroit car makers competed with Japanese car makers. American machine tool makers competed with Chinese machine tool makers. When an American tool company goes bankrupt due to Chinese competition and its workers get lower-paying jobs doing something quite different from what they did for 20 years, you can be sure their productivity goes down.

posted by Seth Roberts on January 28, 2009 #

Aaron, almost everything that you write about economics is BS, though you don’t know it. Actually, the more I read you on the topic, the less sense you make, as if you were unlearning daily.

Your little inanity about unemployment being 5% to keep employees on their toes is probably the stand-out most ludicrous thing in this essay. 5% is actually a very tight employment market, one in which it’s very easy for employees to switch jobs. It’s an unemployment rate of 15% or 20% that would serve companies “better” for keeping folks on their toes - but that level of human resources being put to waste would mean a less productive economy as a whole, and thus less wealth to go around.

And because of supply and demand, employment rate is almost irrelevant to an economy in an equilibrium. The poorest country in the world could create jobs for all remaining unemployed people very easily. Just set them digging holes with spoons, instead of shovels or digging machines - but they wouldn’t be any richer for it.

Anyhow, you can look forward to less interruption from me, as your incoherent economic ramblings have gone on too far. I fear you’ve slipped into some kind of absurdist ideology. You seem to be displaying cult-like paranoid thought patterns, postulating the existence of “cadres” of wealthy people conspiring to keep people out of work.

I’m not in the psychotherapist game, but you might want to get that checked out.

posted by Barry Kelly on January 28, 2009 #

What disturbs me about this post is not the accuracy or inaccuracy of it, but the grandiose and demagogic tone you are slipping into here. Gee, thanks Aaron, for laying bare the mysteries of the economic propagandists in a few short, uncited paragraphs.

But, as for the accuracy: Do you realize how dumb you look when five minutes of googling turns up graphs that show unemployment bottoming out at 4% in the late 90s, with a sharp up-tick in inflation at the same time? Do you just make this stuff up? (http://data.bls.gov/PDQ/servlet/SurveyOutputServlet, http://inflationdata.com/inflation/images/charts/Annual_Inflation/annual_inflation_chart.htm )

posted by Mark on January 28, 2009 #

“Countries don’t really do that sort of thing”

Uhm… Actually they sort of do. Read up on Iceland.

posted by Már Örlygsson on January 28, 2009 #

The bit about inflation targeting was becoming a distraction, so I softened it.

posted by Aaron Swartz on January 28, 2009 #

Mark: I’m just trying to summarize research for busy readers. For more details on the Federal Reserve stuff, you could try the Predator State or some Jamie Galbraith papers. For the rest, start with Paul Krugman’s Peddling Prosperity.

posted by Aaron Swartz on January 28, 2009 #

Your problem with the Fed is that it supposedly targets unemployment rates under the guise of keeping inflation low. Assuming you agree with the need for stable low inflation, any frustrations you have with the Fed would end if they simply targeted inflation directly. The Reserve banks of Australia, New Zealand, UK, Canada, South Korea, South Africa have been given a monetary policy of inflation targeting. It’s a policy that should be advocated for the Fed.

posted by Steve on January 28, 2009 #

Your understanding of economics is not at a level where you should be writing about the subject authoritatively, but that isn’t the major crime here. The minute that any intellectual advises others to actively ignore and distrust people on a subject, they are damaging the core of intellectual curiosity, honesty and transparency that the very existence of the intellectual society depends on.

For the fear and ignorance you inspire, you should be ashamed. For your lack of expertise in economics, there are books.

posted by Brad Fults on January 28, 2009 #

Just came back to say something more about 5% unemployment rate being a target for conspiring bankers.

Think about frictional unemployment, i.e. the unemployment inherent in people in the process of moving from one job to another, or going from school to the workforce, or at the other end.

Just suppose if people were to average 1 month between jobs, and that they change their job once every two years. Assuming that employment turnover is at a constant rate throughout the year, it would mean on average that 1/24th of people are unemployed at any given moment.

That’s only a little under 5%, and assumes complete employment - i.e. no long-term unemployed.

You can quibble with my assumptions, but you’ve got to see that mere turnover is a substantial fraction of that famous 5%.

Oh, and you’re becoming a Marxist. Just thought you might like to know.

posted by Barry Kelly on January 29, 2009 #

Sure, frictional unemployment is unavoidable, but why should it be a target? Why not just make unemployment as low as you can?

posted by Aaron Swartz on February 6, 2009 #

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