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Saturday, September 01, 2012

The Problem is Lack of Demand

The chair of Bush's Council of Economic Advisors, Ed Lazear, says that the unemployment problem is not structural, it's due to lack of demand:

Jackson Hole Paper: True Cause of High Unemployment Is Basic Economic Weakness, by Michael S. Derby, WSJ: Is the job market weak because of structural changes, or is a lack of demand the true factor keeping unemployment rates high? ...
The answer isn’t just academic: If a lack of demand is behind high unemployment, the Federal Reserve can help fix the situation via monetary policy stimulus. Structural problems, however, are beyond the reach of those remedies.
A paper presented Saturday at the Kansas City Fed’s annual Jackson Hole, Wyo., research conference argues that what currently ails the economy is indeed a demand problem. That suggests the Fed has room to act if it chooses to do so. The paper was written by Edward Lazear of Stanford Graduate School of Business and James Spletzer of the U.S. Census Bureau. Mr. Lazear was also a chairman of President George W. Bush’s Council of Economic Advisers.
“An analysis of labor market data suggests that there are no structural changes that can explain movements in unemployment rates over recent years,” the authors write. “Neither industrial nor demographic shifts nor a mismatch of skills with job vacancies is behind the increased rates of unemployment.” ...
Meanwhile, some of the trends some have used to support the structural argument—the decline of factory jobs, changing labor participation rates, and the benefits education offer to wage growth—have been in play for a long time, well before the current economic troubles started, the authors write.
The authors discount the idea that the long duration of unemployment seen lately is a sign of structural changes. They tied the extended duration of unemployment to the depth of the downturn, saying “the current recession does not appear fundamentally different from prior ones, except that it is worse.”

Some members of the Fed's monetary policy committee sitting in the audience for this paper have used the structural unemployment argument to argue against more help for the economy. If economics was an evidence based science this, and the mountain of other evidence pointing in the same direction, would cause them to change their minds and support more accommodative policy -- the potential benefits of doing more are much higher than they have estimated. Instead, we'll hear the same old arguments from the same people, or they'll search until they find something else that agrees with their priors, and use that to defend them. It's the same with fiscal policy, theory and evidence are ignored in favor of bogus arguments there too, and it's all very frustrating.

    Posted by on Saturday, September 1, 2012 at 11:51 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (69)


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