Since around June 2009 many indicators have been pointing up: GDP has been rising in all major economies, world industrial production has been rising, and US corporate profits have recovered to pre-crisis levels. Yet unemployment has hardly fallen in either the United States or Europe--which means that the plight of the unemployed, especially in America with its minimal safety net, has grown steadily worse as benefits run out and savings are exhausted. And little relief is in sight: unemployment is still rising in the hardest-hit European economies, US economic growth is clearly slowing, and many economic forecasters expect America's unemployment rate to remain high or even to rise over the course of the next year.
... So what would we recommend doing? Practically everything that might stimulate [demand]. If more spending on infrastructure is politically impossible, at least make the case for it and pound its opponents for their obstructionism. (It's worth noting that President Obama’s recent proposal for a national infrastructure bank is very similar to a proposal that has been endorsed by none other than the bitterly anti-Obama Chamber of Commerce.) Targeted, temporary tax cuts--like the temporary incentives for business investment also recently proposed by the Obama administration--aren't our preferred policy, but they would be better than nothing. And monetary expansion should be pursued through every route possible--yes, it's uncertain how effective any given measure would be, but that's no reason not to try.Background information:
... the Federal Reserve can, I think, make a contribution on the employment side by mitigating economic fluctuations--by stabilizing real activity. I thus translate the "maximum employment" proviso of the Federal Reserve Act as a mandate for the Fed to lean against the wind, stimulating the economy when the economy is in recession or unemployment is clearly in excess of the NAIRU (the non-accelerating inflation rate of unemployment--the minimum rate of unemployment consistent with stable inflation), and restraining the economy through tighter policy when economic activity is pushing against the limits of capacity with inflationary implications. This is what the Federal Reserve has traditionally done and it is what I think the Fed should continue to do.But now that the central bank has run into the zero-interest-rate lower bound, making conventional monetary policy ineffective, open conflict has broken out between "saltwater" economists (like Krugman) and "freshwater" economists (like Robert Lucas and Edward Prescott). Krugman explains the history in How Did Economists Get It So Wrong? (2009) (previously). Saltwater economists are pushing for fiscal expansion, temporarily borrowing and spending to boost public demand and compensate for the slump in private demand, rather than cutting public spending to match the slump in tax revenue; they argue that the US had much higher public debt during World War II. Freshwater economists are vehemently opposed to fiscal stimulus, arguing that it's a problem of structural unemployment (a mismatch between skills needed and workers) that the free market will resolve in the long run.
Take Applied Materials, a big US manufacturing company, which earlier this year shifted its chief technology officer and research and development operations to China. The company said it needed its R&D to be close to the source of its manufacturing operations and to its biggest future market. This is the opposite of what is supposed to happen. America was meant to keep the high-end jobs at home, while China would get all the low-value added production.for more background here's an excerpt (self-link!) from the end of influence that i thought was a particularly nice overview :P cohen & delong, in turn, believe much of the blame/cause lies in finance (as does cowen).
But in practice researchers benefit from proximity to the production processes, which require constant trial and error. A cursory look at the US’s trade deficit illustrates the trend. Far from importing low cost manufactured goods, the US is buying high-tech stuff from such countries as China and Brazil, including aircraft engines, computers, turbines and heavy duty trucks. And it is exporting growing volumes of low-tech stuff, including pulp and paper, oil seeds and other commodities. People who lose their jobs in the US are on average moving to jobs that pay roughly a fifth less than their previous jobs. Others are having difficulty finding any jobs at all.
That trend has only been accelerated by the Great Recession. According to Manufacturing and Technology News, the number of US workers displaced by US trade policy rose by 59 per cent in 2009 over 2008, thus qualifying for special benefits from the US Department of Labor. The same publication reports that the US now accounts for less than 5 per cent of global solar panel production despite the fact that it invented the technology in the 1980s.
The direction is hard to deny. America is not producing new jobs in anything like the quality or the quantity it needs to replace the high-end jobs it is losing.
(5) Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be ‘patriots’, perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You could do anything you liked with them, if you would treat them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish. It is a mistake to think that they are more immoral than politicians. If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way. Perhaps you will rejoin that I have got quite a wrong idea of what all the back-chat amounts to. Nevertheless I record accurately how it strikes observers here.**see i would include institutional change as well, per romer
(6) Forgive the candour of these remarks. They come from an enthusiastic well-wisher of you and your policies. I accept the view that durable investment must come increasingly under state direction. I sympathise with Mr Wallace’s agricultural policies. I believe that the SEC is doing splendid work. I regard the growth of collective bargaining as essential. I approve minimum wage and hours regulation. I was altogether on your side the other day, when you deprecated a policy of general wage reductions as useless in present circumstances. But I am terrified lest progressive causes in all the democratic countries should suffer injury, because you have taken too lightly the risk to their prestige which would result from a failure measured in terms of immediate prosperity. There need be no failure. But the maintenance of prosperity in the modern world is extremely difficult; and it is so easy to lose precious time...
GDP = consumption + investment + government spending + exports - importsor
GDP = C + I + G + X - MIf households reduce their consumption C, but GDP drops at the same time (because business confidence is low and thus investment I is low), all that happens is that GDP runs under capacity and unemployment is high. Which is exactly what's happened.
And right now, by any rational calculation, would be an especially good time to improve the nation’s infrastructure. We have the need: our roads, our rail lines, our water and sewer systems are antiquated and increasingly inadequate. We have the resources: a million-and-a-half construction workers are sitting idle, and putting them to work would help the economy as a whole recover from its slump. And the price is right: with interest rates on federal debt at near-record lows, there has never been a better time to borrow for long-term investment.Infrastructure spending is also a good candidate because it's temporary by nature. A more right-wing solution would be arms spending, I suppose.
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You mean to say trickle down economics hasn't magically resolved the issue?
posted by yeloson at 10:38 AM on September 28, 2010 [10 favorites]