A Baseball Analogy for Understanding Our Economic Problems and Unemployment

Keynesians tell us we just need more aggregate demand. But in a world where fans are already lining up for the iPhone 5 and the seventh self-serve froyo establishment has opened up within strolling distance from my desk, one has to consider if more demand is the only issue. Sure, more consumption would be helpful. Very helpful in fact, as long as that consumption was not engineered by a manipulated process. But the question at hand is not whether increased demand for goods and services would benefit the economy, but if that is the only thing holding us back.

A baseball analogy: Suppose you’re the owner of the Washington Nationals and you are frustrated your team is losing every year. So you go out and buy the two best pitchers in the game, Roy Halladay and Justin Verlander. You think you are lock to win your division, and probably the National League pennant. But a season goes by and even though your pitchers perform well—including a break out performance by your young superstar Steven Strasburg who throws 300 strikeouts—your team is in last place come October yet again.

You can’t figure it out. Your manager, John Maynard, comes to you and says that the team needs more pitching, since they are the key to the game. It is impossible to deny that pitching is vital to a healthy team. So you trade for league leading southpaw Clayton Kershaw, giving you a pitching staff that is the envy of all baseball. Unfortunately, you still loose 90 games the next season and are the laughing stock of baseball.

It is only then that you realize the problem isn’t your pitching staff. With all the focus on the hurlers, you forgot to invest in your offense and defense on the field. Your shortstop is slow, the teams out fielders are in their 40s, and the line-up features not a single home run hitter. Manager Maynard encourages you juice up the pitching staff some more and grab another ace. After all, Tim Lincecum’s long hair would accent the swirl in the National’s logo nicely. But the problem isn’t just pitching—which is the metaphoric consumption in this tale if you were not following. There are deeper issues at work.

The economy—or the team—can always benefit from increased consumption, assuming the Fed isn’t fueling the consumption with easy money like during the housing bubble. But encouraging aggregate demand is not the only problem in our system right now. According to the Bureau of Economic Analysis, seasonally adjusted real personal consumption expenditures are higher now than their peak before the recession at the end of 2007. And to be clear, real PCE means these numbers are adjusted for inflation. Consider this chart:

If we took this chart back to 2002, we would see personal consumption with an index value of 90.347. It isn’t incredibly important for this point what that number means, it is just a benchmark. By the start of 2005, consumption had reach 98.825—and this is an inflation adjusted statistic. Still accounting for inflation, PCE hit a pre-recession peak of 105.738, in the fourth quarter of 2007, right before the recession began in December of 2007. The shaded area notes the length of the recession and sees the fall in demand.

But with the recession technically over in June 2009, personal consumption saw its first inflation adjusted growth in the third quarter of 2009. Since then, demand has steadily risen and as of this summer, the second quarter of 2011, personal consumption was measured at 106.625—higher than the pre-recession peak. And still, the economy is barely growing, and might even have GDP revised into the negative when the next BEA numbers come out.

You could even claim that the rise in demand was a result of the stimulus, but the fact would be that we are seeking increased consumption, but there are still pressures on the economy. Stimulus is not the only answer. More unemployment benefits are not the answer. Transfer payments to the states to cover their budget shortfalls in the name of paying teachers and police officers is not the path to economic recovery.

We need a speedy shortstop—i.e. competitive, pro-growth tax code reform.

We need new, young outfielders—i.e. education reform to address the skills mismatch as there are millions of workers with skills that are no longer needed.

We need power hitters—i.e., the delveraging of national and household debt so that we do have have downward pressure on economic growth and workers and entrepreneurs have the flexibility to innovate and create in powerful, dynamic economy.

Continuing to try and pour government money into attempts at boosting demand—i.e. just buying more pitchers for our roster—is not going to solve the problem. There may be some short-term benefits for those receiving government stimulus money, but the economy as a whole will not recovery, and we will be ignoring what truly ails our economic system.