Demand Crisis, Structural Crisis, or Both?
Paul Krugman seems to believe that something like the bubble economy we enjoyed until it burst in 2008 could be had again if only our leaders were sufficiently bold.
Paul Krugman asserts flatly that, “The slump in the United States and other advanced economies is the result of a failure of demand — period, end of story. All attempts to claim that it is somehow structural, or maybe the result of reduced incentives to produce, have collapsed at first contact with the evidence.”
I continue to be skeptical of this claim, seeing much of the decreased demand as evidence of a structural problem. In my view, the shock to the financial system and the resulting global recession sped up a long-term trend of shedding jobs in favor of technology and outsourcing. Joseph Stiglitz, for example, argues that attempts to stimulate the economy actually further accelerates this phenomenology because, “In a globalized economy, the money is looking for the best place to go. And where is it finding it? In the emerging markets. ”
Regardless, Krugman fears that the demand failure caused by a liquidity trap is causing structural problems.
But there is a real concern that if the slump goes on long enough, it can turn into a supply-side problem, because investment will be depressed, reducing future capacity, and because workers who have been unemployed for a long time become unemployable. This is the issue of
And if you look at manufacturing capacity, in particular, you can already see that starting to happen.
[T]here was a mini-version of the current decline in manufacturing capacity after the 2001 recession: capacity basically stopped growing in the face of a protracted weak economy. But this time around, with manufacturers operating way below capacity with little prospect of needing more capacity any time soon, they’re both scrapping equipment and failing to expand. The result is that when we finally do have a real recovery, we’ll run up against capacity constraints much sooner than we would have if there had been no Lesser Depression.
Arguably the same thing is happening in other sectors of the economy, as the long-term unemployed begin to become unemployable, as the long shortfall in residential construction leads to rising rents (and a small uptick in core inflation) even though demand remains deeply depressed.
Hysteresis can mean that the costs of failing to pursue expansionary policies are much greater than even the direct effects on employment. And it can also mean, especially in the face of very low interest rates, that austerity policies are actually self-destructive even in purely fiscal terms: by reducing the economy’s future potential, they reduce future revenues, and can make the debt position worse in the long run.
I’m skeptical of this, too.
First, there’s a pretty good chance that the long-term unemployed are actually already unemployable. Jobs that have gone away because they’re now being done by robots, software, or people in the developing world aren’t coming back no matter how much we prime the pump. Nor am I sure why we’d invest public funds in building more housing when prices for existing housing stocks are dropping and millions of Americans are underwater and unable to sell.
Second and relatedly, it would indeed be a major cause for concern in manufacturers were selling off equipment and facilities that would otherwise be useful for scrap. Presumably, though, they’re either scrapping equipment that’s outdated and uncompetitive or selling it off to others who will put it to more productive use. After all, why would they buy it, otherwise?
Krugman seems to believe that something like the bubble economy we enjoyed until it burst in 2008 could be had again if only our leaders were sufficiently bold. While I agree with some of his prescriptions–a time of near-zero interest rates and high unemployment is a great opportunity to make massive investments in the national infrastructure–I’m afraid that his premise is flawed.