The Main Point
Peter Dorman at Econospeak brings us another reminder about policy decisions on the economy. Reposted from Econospeak:
The Main Point
Macroeconomics is complicated and political economy is devilish, so it is easy to get lost in the details. From time to time, it’s good to come up for air—to remember what the fundamental issue is. In a way, the debate over structural versus cyclical factors invites us to do just that.
Suppose the current recession/depression is mainly structural. Suppose it is due to an immense misallocation of capital and labor, a failure to foresee what our economy would really demand in the years ahead. According to this story, we have trained too many masons and anthropologists and invested in too many building cranes and liberal arts colleges, and it will take years to shift our human and produced resources to more valuable pursuits. (Actually, I think there continues to be an enormous misallocation of investment, but this will become apparent only when the threat of global warming is taken seriously.) If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff.
If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock. We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further. But think about it: if we have the wherewithal to resume prosperity, what holds us back? And why should rational people accept any excuses for policies that delay it?
Repeat: we have everything we need, right now, to restart our economies. All the unemployment, the hardship, the lost opportunities are unnecessary. That’s the main point.
The secondary point is about the why. There are ultimately two reasons why economies like ours get stuck in a cyclical rut. The first is that there is a reinforcing cycle of insufficient demand and insufficient investment. This is where standard countercyclical policy comes in: through fiscal deficits the government increases demand on its own initiative, and through monetary easing an impetus is added to investment. We are near the limit of what easing can do (diminishing returns to the QE’s), but not anywhere near the limit of fiscal expansion.
The second reason arises in balance sheet recessions: too much private borrowing has taken place, debtors find it difficult to sustain debt service, and both debtors and creditors retrench. In this case, which is ours, the essential problem is that fulfillment of claims on wealth—both credit claims and equity claims on debt-related assets—interferes with the conditions required for restarting growth. In other words, the shadow of past wealth creation is depriving new wealth creation of sunlight. While respecting wealth claims is desirable during normal times, since it supports long-term planning, there come episodes in which a choice must be made between the past and the future. This is such a time. Wealth claims need to be trimmed, quickly and sufficiently, in order to reduce leverage and permit economies to return to growth. We shouldn’t forget the main point, which is that economic growth produces the stuff of which real wealth is made, while satisfying the claims inherited from yesterday only allocates this stuff. (And in a slumping economy the claims can’t be honored anyway.)
If you accept the cyclical story, and the evidence certainly weighs in its favor, you should not accept another month, much less year after year, of excuses for austerity.
Noah Smith posted recently about the structural vs cyclical question.
http://noahpinionblog.blogspot.com/2012/05/cyclicalists-should-start-talking-about.html
I think he is off target.
The structural vs cyclical issue is a red herring. The real dispute is between those calling for fiscal stimulus, and those calling for austerity. None of the legitimate structural factors Noah mentions would be supported by any of the structuralists (frex: investing in infrastructure and education.) Because that is not the issue. Even austerity, per se, is not the point. The point is blind opposition to any kind of governemnt intervention, via stimulus, regulation, tax policy, or anything else you can think of.
It looks like the tea party, Austrians, and Libertarians have won, and we are basically screwed.
Alas,
JzB
Maybe not. There is an election coming up and not just for the presidency. As the last couple of years have demonstrated, congress matters too.
The neokeynesians have lead the march for 30+ years with the bullcrap that aggregate demand drives growth. Credit extension without savings got us in this mess. Now the US owes the equivalent of 2x WORLD GDP to its people and creditors over the next 50 years. How can you even debate the structural vs cyclical issue, knowing neither is a means to an end of this financial ruin?
Maybe both….?
I think structural issues have been slowly brewing since the great globalization rush began.
In 2007-2008 we hit a severe cyclical recession and a lack of demand.
I think each problem compounds the search for a solution to the other.
We are in a bad place.
What do the prospects look like for congressional elections? I used to go to fivethirtyeight to see Nate Silver’s quite accurate projections, but that seems to have gone away since he’s moved in with the NY Times.
I’d doubt there’s much hope for a majority that is willing to accept the cyclical story and act as prescribed, let alone a filibuster-proof majority. Do we have to wait and see how bad it gets and maybe get where we need to be by the 2014 midterms? Or maybe Europe bails us out by turning their policy around before we get around to it?
Greece — that’s how bad it will have to get. And, yes, we will have to wait until we get there. And, yes, we are going to get there becaude that’s what the Oligarchy wants.
Is the text “there come episodes in which a choice must be made between the past and the future” a call for a debt jubilee? Also, I wonder what might be pointed to as the strongest evidence for the cyclical story.
Pfui. The neokeynesians were overwhelmed by the Chicago School and just plain conservative/libertarian/Austrian paid operatives. Ever since Laffer drew on the back of a cocktail napkin U.S. policy has been heading toward a cliff. It’s called The Washington Consensus, or the Mont Pelerin Society, and some other countries have turned away from it, in South America and Asia, but unfortunately it still rules in the U.S. and Europe. Policies that massively transfer wealth from the poorer sectors to the wealthy.
with the House in Republican hands, the Senate is irrelevant.
But if Romney, wins, expect things to really start cooking.
They’ll get everything they want passed and then blow out another big credit bubble to cover their tracks.
This was their MO in the 1980s and 2000s, I don’t think they’ll do any different now.
We actually hit severe cyclical recession in 2001 and then blew a $7 trillion dollar credit bubble to get out of it:
http://research.stlouisfed.org/fred2/series/CMDEBT
cyclical, structural, nobody outside of Keen has the first clue what has been going on.
What we’ve really got is a velocity problem — money can’t stay in circulating in the paycheck economy for long. Our $600B/yr trade deficit is one driver of that, along with the age-old issue of economic rents in housing and health care.
The latter at least provides some employment:
http://research.stlouisfed.org/fred2/series/CES6562000101
but 14 million for something that is 1/6th our economy in spending terms just shows how little of our health spending stays in the middle-quintile economy.
The economy is unbalanced due to all these rents being extracted from the 99%.
Krugman & Delong’s call for inflation is, I fear, too blunt an instrument, since the rent-seekers have insinuated themselves in all sectors of the economy with pricing power — energy, real estate, health care.
To paraphrase the movie Network: “The 1% have taken money OUT of the paycheck economy, and now they must PUT IT BACK!”.
The previous decade was a bizarre attempt of the middle class to live in borrowed money from the home ATM. That was a decent stimulus but only could last so long.
I find it perplexing how few people seem to understand what’s going on now. People string words together that sound good, but I don’t see much understanding, even from Krugman-calibre commentators.
We don’t have a “demand” problem or a malinvestment problem. We have, mainly, a distribution problem.
Troy: “But if Romney, wins, expect things to really start cooking.
They’ll get everything they want passed and then blow out another big credit bubble to cover their tracks.
“This was their MO in the 1980s and 2000s, I don’t think they’ll do any different now.”
Except that the 1980s and 2000s were part of the first phase of the Starve the Beast strategy, to build up the debt and deficit to frightening proportions. The Clinton surpluses prevented the second phase of Starve the Beast in the early 2000s. Only now, with the combination of economic hardship and high debt, is the time ripe for the second phase, cutting gov’t to the bone. If the Republicans retain the House, they will try it. Romney will aid and abet them, Obama will not oppose them unless things get really bad. As for the Senate, the House controls the purse strings. If the House does not pass appropriations for gov’t spending, what can the Senate do?
LCR: “The neokeynesians have lead the march for 30+ years with the bullcrap that aggregate demand drives growth”
Good morning, Mr. Van Winkel. During your long slumber the neoliberals, aka modern conservatives, have taken over policy for the developed world, with leaders such as Thatcher, Reagan, Bush II, and Merkel. Neokeynesians, in the wake of the global financial crisis of 2007-2008, are attempting, without much success, to regain the lead. Paleoconservatives swept into Congress in 2010, thereby delivering a strong blow against neokeynesian aspirations.
@ save_the_rustbelt
Prolonged unemployment can turn cyclical problems into structural ones.
DeLong pointed out a couple of years ago that structural unemployment should mean hiring in some sectors at the expense of others. That apparently has not happened. That should mean that lack of demand (namely, the ability to pay) is the greater problem now.
Troy: “What we’ve really got is a velocity problem — money can’t stay in circulating in the paycheck economy for long.”
We have probably got a money problem, too, but your point is well taken. That is why it is important to get money into the hands of people who will spend it. Such as state and local governments, the unemployed, and poor people. That way the money will pass through more hands before it disappears by paying down debt.
Troy: “The previous decade was a bizarre attempt of the middle class to live in borrowed money from the home ATM.”
A similar thing happened during the 1920s. It is a symptom, as you say, of money being siphoned off into the pockets of the wealthy.
poppies –
Also, I wonder what might be pointed to as the strongest evidence for the cyclical story.
If the problem were structural, certain segments would be aggressively hiring and wages would be going up in those segments. There is no evidence that is happening.
Krugman has been all over this. You should read him.
But, as I said in the first comment, it isn’t about structural vs cyclical. The structural argument is contrived, and Krugman works hard to combat it, because it is a pervasive lie.
Troy is partly right. We certainly have a distribution problem. But we also have a demand problem, and a misallocation problem. I won’t call it malinvestment because speculation in abstract derivatives isn’t investment. It’s highly sophisticated rent-seeking that does absolutely nothing to promote economic health for society in general. It just helps to further enrich the already wealthy.
JzB