A simple parable of crowding out

Think tank X decides to expand its policy output on urban economics, so it hires some new scholars in the area.  That means fewer people teaching urban economics in academia, or maybe fewer people driving Uber.

It also means more computers in the think tank sector and fewer computers elsewhere.

Or make the example corporate.  Microsoft hires more economists, so fewer economists work for banks.

None of this has to involve higher interest rates, whether on government securities or corporate bonds, yet still there is an opportunity cost from the new decisions.  Do interest rates have to go up every time resources are switched across sectors?  No.  Will there in general be a significant “multiplier” from these sectoral shifts?  I say that question is a category mistake, but if you insist the multiplier could easily be negative rather than positive.

There is some upward wage pressure from these labor reallocations, and you could consider such wage changes as evidence for this crowding out.  Note three points.  First, real wages have been rising as of late.  Second, the sectoral shift also could cause some wages to fall.  Third, a lot of wage groups have seen falling real wages since 1999-2000, at least as we measure wages by traditional means.  The “rising wage” pressure therefore may take the form of “wages fell less than otherwise.”  Pointing at stagnant wages for an economic group therefore is not, in the recent environment, evidence for no crowding out of labor.

These are all simple points, but they are being forgotten in today’s discussion.  A good rule of thumb is to start by viewing the problem in real terms rather than focusing on “finance capital.”  As the point applies to labor, so does it apply to tractors.

Here is an earlier post on related topics.


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