IGNORING THE CONSEQUENCES OF DOWNSIZING.

Marginal Revolution reports on an investigation into the nature and causes of the failure of Our President's stimulus to stimulate.

One major problem with ARRA was not the crowding out of financial capital but rather the crowding out of labor.  In the first paper there is also a discussion of how the stimulus job numbers were generated, how unreliable they are, and how stimulus recipients sometimes had an incentive to claim job creation where none was present.  Many of the created jobs involved hiring people back from retirement.  You can tell a story about how hiring the already employed opened up other jobs for the unemployed, but it’s just that — a story.  I don’t think it is what happened in most cases, rather firms ended up getting by with fewer workers.

There’s also evidence of government funds chasing after the same set of skilled and already busy firms.  For at least a third of the surveyed firms receiving stimulus funds, their experience failed to fit important aspects of the Keynesian model.

At New Republic, Jonathan Chait attempts to rebut the interpretation of the results.

Suppose Company A creates a new job, and fills it by hiring a worker away from Company B. What do the authors suppose think happens to the job at Company B? Do they say, well, that's it, we lost Joyce, nothing we can do about that in an economy with unemployment at only 9%.

I read the paper in the vain hope of finding the authors' explanation of what they think happens when a new job is filled by moving a worker from another job. I did not see one. Nor did I see any attempt to demonstrate, or even suggest, that the newly-opened jobs of workers moving into stimulus-created jobs were going unfilled. They genuinely seem to assume that "job shifting" is simply the opposite of job creation.

In the paragraphs that follow, he lapses into some whinging about the Koch brothers, perhaps hoping to discredit the Mercatus Center for taking tainted foundation money. Instead, he could have dealt with the problems a company faces in attempting to replace one worker with a comparable one.  That's the approach Steven Horwitz takes at Coordination Problem.

Chait's assumption of the fungibility of labor is the key.  His argument presumes that labor can easily be substituted in this way and that the human capital of those workers hired for stimulus-funded projects is the same as those in the unemployment lines.  That's the only way that the unemployed person could be swapped in when the stimulus-funded worker is bid away.  From an Austrian perspective, human capital, like physical capital, is most emphatically not fungible and is heterogeneous in use.  Thus there's no reason to believe that the unemployed workers would be a substitute for the bid-away worker.  Workers, like physical capital, have to fit into the jigsaw puzzle.  Their human capital must be complementary to the human and physical capital in the firms where the labor has left.

This is particularly true when we recognize the way in which the boom of the 2000s also distorted the structure of human capital across the economy.  It may well be that the currently unemployed are examples of human capital malinvestment and that they will have to "refit" themselves in order to find work in the post-recession economy.

Perhaps so, although the Marginal Revolution interpretation about firms getting by with fewer workers is probably closer to the truth.  Here's how it works in higher education.

 If a full professor retires and the dean offers the department only a lecturer as replacement, are the other 50- and 60-year-old eminences going to protest? Unlikely, as long as their working conditions aren’t affected.  After all, lecturers, adjuncts, and graduate assistants make their lives easier.  Indeed, if courses are over-enrolled and the dean provides only funds to pick up three adjuncts instead of a new tenure-track line, won’t the former plan ease the burden on existing professors more than the latter plan?

That's the best-case scenario. Reality often is one or two separations (whether by retirement or job change or what have you) and perhaps one search, and even that might be subject to rescission.  No matter the dynamics, however, a separation is often headquarters's best management tool, as it permits downsizing without firing anybody.  If crucial functions are gutted, maybe somebody will worry, but maybe not.