Princeton University Economics: there is no such thing as opportunity cost

Because I am a holder of a doctorate from a program that was not "elite" by any standards, perhaps I don't understand the power that "elite" economists have in their possession to do away with economic laws. While Paul Krugman is on vacation, his Princeton colleague, Alan Blinder, gives us the latest howlers.

Writing in the Wall Street Journal, Blinder wonders how anyone might think that lots and lots of federal spending would be "job killing." Impossible! Blinder huffs:

It is easy, but irrelevant, to understand how someone might object to any particular item in the federal budget—whether it is the war in Afghanistan, ethanol subsidies, Social Security benefits, or building bridges to nowhere. But even building bridges to nowhere would create jobs, not destroy them, as the congressman from nowhere knows. To be sure, that is not a valid argument for building them. Dumb public spending deserves to be rejected—but not because it kills jobs.

The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?

One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes.

For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million.

This is a most interesting economic worldview. While Blinder might be "technically" correct in that if government borrows a trillion dollars and spends it on whatever, then in the very short term, no doubt there would be new employment. Would it create new wealth? That is another matter, and would it be sustainable? probably not.

Yet, Blinder really doubles back on himself in that first paragraph. Let me repeat what he said:

But even building bridges to nowhere would create jobs, not destroy them, as the congressman from nowhere knows. To be sure, that is not a valid argument for building them. Dumb public spending deserves to be rejected—but not because it kills jobs.

What would constitute "dumb public spending," given that he believes that government spending "creates jobs," even "dumb" spending. What is the criteria for determining that the spending is "dumb," and why would it matter, anyway?

No doubt, Blinder would employ an opportunity cost argument but then he contradicts that argument not only within his sentence, but also further down in the article. He states:

A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.

There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out. (emphasis mine)

So, all that is needed to eliminate "crowding out" (which also is opportunity cost in action) is for the Fed to hold down interest rates by mere fiat? (Oh, I forgot. Ben Bernanke was the chair of the economics department at Princeton before going to the Fed, and he still is listed as being on the faculty there. If one is a Princeton economist, a mere declaration can eliminate that pesky thing called opportunity cost.)

Is all of this spending "job killing"? If one goes by Blinder's ultra-short term view of spending and "job creation," then it is not "killing" jobs. However, if one sees this spending along with other government efforts to prop up the economy as impeding the liquidation of malinvestments and impeding a real recovery, then by all means the government spending spree is killing jobs by the millions.