No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eighteen: The “macro” view of the economy 449 alternate fashion—at least without significant rework. In a similar fashion, labor is also heterogeneous, in that the skills of a person that is unemployed may not be useful for either other currently in demand private sector uses or for government projects. While labor is much easier to reallocate than most physical capital—as workers can often go back to school and be retrained—there is a delay while this retraining process occurs. And some labor may not be easy to retrain; older employees especially have a hard time finding a new job that requires alternate skills (certainly at anything like the pay they previously received). As an example of this, consider the financial crisis of 2008, where the initial area of concern was a bursting of a housing bubble. Housing prices had to fall, but also many carpenters, plumbers, roofers, real estate agents, mortgage brokers, etc. all had to find alternate employment. To address this, President Obama and the Democratic congress passed the American Recovery and Reinvestment Act in 2009, signed into law less than one month into the new administration’s term. Much of the focus of the stimulus, however, was on energy, science and technology, education, health care, and public infrastructure (buildings, roads, rail, etc.). Many stimulus dollars went to areas that did not directly benefit those unemployed workers that formerly were in housing-related employment. Of course, the problem at the time was too much housing, so it was appropriate not to devote new resources to housing. But former carpenters, roofers and mortgage brokers have little to no ability to design new bridges or create green energy. Failure to recognize this may be why the stimulus plan famously underperformed in its predictions on employment. The assumption that labor is able to seamlessly shift between jobs may have been reasonably appropriate in an earlier era where human capital was low, but not in modern economies. To say that labor is highly specialized is to say that it is heterogeneous. And this means there is likely a private-sector opportunity cost to government spending, even when there are idle resources. That labor is not easily substitutable, in contrast to the implicit Keynesian assumption, is easily seen by any number of real world thought experiments. Think of whether you are ready to answer the help wanted ad for a nuclear physicist or a radiologist. Many of the readers of this textbook are in college or will shortly be. How many years do you think it will take for you to be trained to reach your particular job goal? While it’s true that even specialized labor can realign into lower skilled tasks in other industries, it might come at a significant cut. Imagine a mortgage broker who was making $100k/year prior to the recession, and his next best opportunity was as a retail manager making $40K. Maybe it makes sense to wait and see if the market recovers? After all, time working at the retail store is time that can’t be used to find an opening somewhere else in the mortgage business. Likewise, the Bible presents a very diverse picture in terms of human capabilities: the very diversity that we earlier argued (chapter 2) leads to specialization and gains from trade, implicitly implies heterogeneity of labor.