Here’s a simple question – one that I (and others) have asked before [although I’m too busy now to search for relevant links] – namely, by what logic does an unemployment rate a few percentage points higher than the natural rate nullify the foundational laws of economics? How is it that greater-than-normal amounts of idle resources turn “there ain’t no such thing as a free lunch” into “there is such thing as a free lunch!”? Why would, for example, Matt Yglesias suppose that the core insight of Bastiat’s account of the fallacy of the broken window does not apply to the U.S. economy circa August and September 2012?
Today’s (July 2012’s) rate of unemployment is 8.3 percent. While unquestionably too high, today’s rate of unemployment is only 3 or 3.1 percentage points higher than the natural rate of unemployment.
If an economy in which 94.8 percent of the workforce is employed is an economy to which Bastiat’s lesson applies, is it really true that Bastiat’s lesson no longer applies if only 91.7 percent of that economy’s workforce is employed? Is excessive unemployment of labor to the tune of 3 or so percentage points sufficient to allow us to treat the economy as one no longer constrained by scarcity – or as one so freed of scarcity that we can safely ignore Bastiat’s insight?