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WSJ Inane Understanding of Economic Theory

Economics / Economic Theory Oct 14, 2009 - 02:34 AM GMT

By: Paul_L_Kasriel

Economics

Increase Employment the Same Way You Increase Home Sales - Every month in its survey of economists' forecasts, the WSJ asks various inane questions. In its latest survey, one of the questions had to do with what the government could do to increase employment. Now that health-care "reform" appears to be on its way to being a done deal, the D.C. issue du jour is employment stimulus. Various kinds of employer-tax incentives are in the initial stages of being proposed. Of course, the editorial board of the WSJ, which has never encountered a tax cut it did not encourage, is lobbying for a cut in the Social Security payroll tax. Good idea if the WSJ editorial board also argues for an equal cut in Social Security benefit payments. Fat chance of that occurring - i.e., a cut in Social Security benefit payments.


Home sales have picked up this year. Why? One important reason is that the price of homes has fallen in both absolute and relative terms (see chart below). Why did home sales sag prior to this year's pick up? Supply was greater than demand at the prevailing prices. By sellers cutting their offer prices of homes, the quantity demanded of those homes picked up. Yes, there is a gimmicky tax credit that effectively has lowered the sales price to a first-time homebuyer and has increased the future tax liabilities of everyone. But I would argue that the biggest stimulus to home sales this year has been the drop in the prices of these homes.

What does this have to do with stimulating employment? Clearly, at prevailing wage rates, the supply of labor exceeds its demand. Do unemployed workers want to become employed again? Take a hint from successful sellers of homes - lower your prices, i.e., wage rates. This is not meant to be cruel and uncaring. Rather, I am just trying to explain how markets come into equilibrium.

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2009 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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