October 29, 2015
Economists constantly have difficulties figuring out what problem we are trying to solve. The NYT’s discussion of the Chinese government’s decision to switch to a policy that allows most families to have two children, instead of just one, provides an excellent illustration of this situation. At one point the piece explains the policy shift:
“Now the party leadership has acted more forcefully, apparently in the hope that a burst of children will replenish the nation’s work force and encourage more consumer spending.”
The idea of having more children to increase the size of the labor force implies that the problem facing China is inadequate supply. (This is more than a bit peculiar given the enormous growth in productivity in the last three decades. Productivity growth, means more output per worker. It has the same impact on supply as having more workers.)
However, the concern about boosting spending, expressed repeatedly throughout the article, is a concern about lack of demand. At any point in time an economy can be suffering from either supply shortages stemming from a lack of workers or demand shortages because people don’t spend enough to keep the labor force employed. It doesn’t make sense for it to be suffering from both at the same time.
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