More Thoughts on Latest Jobless Numbers, Mexico’s Drug War

Making Sense

February’s 192,000 net new jobs breaks down into 222,000 jobs added in the private sector and 30,000 jobs dropped by government. This provides evidence for one side of the economic policy debate of the moment, you could even say of our time. Those on the right argue that government is too large and has been weighing down the economy as a whole with debt, discouraging investment and thus stifling economic growth. These are the “Hayekians,” followers of economist Friedrich Hayek.

By contrast, “Keynesians” follow economist John Maynard Keynes, who argued that government had to pick up the unemployment slack during a recession, that government spending was crucial to restoring confidence, investment and economic growth. See Paul Krugman’s post in Thursday’s New York Times.

You never want to read too much into month-to-month variations in the data, based as it is on samples and self-reporting. But February’s numbers, and the stock market of late, could be said to tilt in Hayek’s favor. Keynes would respond that at least the Fed, still pumping money into the economy via so-called Quantitative Easing 2 and keeping interest rates low, is following his prescription. But just you wait, Henry Higgins.

If government at all levels, as widely expected, now embarks on serious job-cutting, we’ll get a truer test of Hayek v. Keynes, whose dispute we introduced in December 2009.

Here’s an e-mail we had to share from Suzanne Gallagher, director of Virginia Commonwealth University’s Center for Economic Education:

I’m watching the NewsHour and they are doing a segment on the “drug war.” Would you do segment on the drug problem and explain that it is a demand problem? I’d like to see billboards around the country, saying: “If you use drugs, 15,000 people in Mexico died last year to bring them to you.” Of course the fact that most of the killings are done with guns from the U.S. would be a different story. Maybe that segment would be on “incentives.”

Gallagher means, of course, that in the world of supply and demand, one can’t have one without the other. And that demand leads the way. If people won’t buy (demand) something, it doesn’t matter how much of it someone supplies, however cheaply. There will be no market. In short, if Americans wouldn’t buy drugs, Mexicans wouldn’t be able to sell them.

The connection to murders in Mexico is a bit different. Marijuana, cocaine and heroin come from fairly hardy perennials. In a competitive market, they should be dirt cheap, in which case they wouldn’t prompt much mayhem. But because they’re illegal, their supply is severely limited, their price is high, and the value of controlling production and especially distribution is commensurately lofty. That’s why libertarian economists like the late Nobel laureate Milton Friedman favored the legalization of drugs: to remove the premium or “rent” associated with a “controlled substance.”

As to whether we’ll do such a story, Professor Gallagher, let me end this response they way so many news reports used to end before I started in the business: “Time will tell.” By the mid-1970s, it was an unacceptable cliche. But it was true every time.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._

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