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Tuesday, November 05, 2013

DeLong on Blinder's 'After the Music Stopped'

Brad DeLong reviews Alan Blinder's new book:

You Got Me Feelin Hella Good So I'm Gonna Keep on Dancing: Alan Blinder: "After the Music Stopped": Tuesday Book Reviews Extended Version Weblogging: A Review of Alan Blinder's After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin Press), J. BRADFORD DELONG is Professor of Economics at the University of California at Berkeley

Properly edited shorter version in Foreign Affairs, July/August 2013

Alan Blinder is the latest economist out of the gate with an analytical account of the recent economic downturn. His 2013 After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin) is, I think, the best of accounts--at least the best for those without the substantial background and experience in finance needed to successfully crack the works of Gary Gorton. It is the best for four reasons:

  1. The narrative is very good--it is, from my perspective at least, clear and correct.
  2. Alan Blinder has a deep understanding of macroeconomics--thus he can place the events in context, and explain just how it was that the housing boom and its crash had such catastrophic effects on the American economy while, say, the dot-com boom and its crash did not (and was in fact a net plus for the U.S. economy as a whole: a lot of research and development got done, a lot of useful business-model experimentation took place, and a lot of very valuable twenty-first century virtual infrastructure got built--the housing boom brought us no analogous benefits).
  3. Alan Blinder has a very clear sense of the policy options, both in the past and now: what did work, what would have worked, what might have worked, and what would still work were we to try it to get us out of the current fix we are in.
  4. As noted, the book is very readable, even for those who have not been marinated in finance enough to grasp the technicalities and even for those who find topics like "the fall of the rupee" sensational and interesting. For those who do and have worked in or near Wall Street or it equivalent, I recommend Gary Gorton. For everybody else, I recommend Alan Blinder.The topic is certainly enormously important. The economy is today, still, four and a half years after the crash of 2008, six years after the emergence of the first signs of significant trouble in Wall Street, and seven years after the peak of the housing boom, deeply depressed.

Blinder writes that "policy makers are still nursing a frail economy back to health". I am not so sure that is right. It does not look, to me at least, "frail" and "being nursed back to health". To me, it still looks very sick. Blinder writes: "having the national unemployment rate near 8 percent is a lot better than having it near 10 percent, but it is far from good". Blinder is thinking in terms of an economy in which acceptable (although far from ideal or attainable) employment performance has an unemployment rate of 6 percent, and thus that we are halfway back to economic health.

I see an economy in which the share of American adults who were employed was 63% in the mid-2000s, fell to 58.5% in 2009, and is still 58.5% today. We would have expected the natural aging of America's population to have carried the share of adults at work from 63% down to 62% over the past seven years or so--not to 58.5%. And we would have expected the collapse of people's retirement savings either in housing or in stocks in 2008 to have led many Americans to postpone retirement. Given the collapse in the value of retirement savings and their impact on desired retirements, I see a healthy American economy today as one that would still have the same adult employment-to-population ratio of 63% as the economy of the mid-2000s.

From that perspective, we are not halfway back to health. We had a gap of 4.5% points between actual employment and full employment at the end of 2009. We have a gap of 4.5% points between actual employment and full employment today. We are flatlining. It is true that in late 2009 there were still real and rational fears that things might become worse very quickly, and that that possibility is no longer on the menu. But in my view our "recovery" has taken the form not of things getting better but of having successfully guarded against the possibility that things would get even worse. And that is a very feeble recovery indeed. And, in Europe, things are getting worse right now.

Most economists would say that there is a silver lining, in that this is not a Great Depression. I have been calling the current episode the "Lesser Depression". I now think that most economists are--and that I was--wrong in claiming this silver lining. ...[continue to much, much, much more]...

    Posted by on Tuesday, November 5, 2013 at 11:09 AM in Economics, Financial System, Fiscal Policy, Monetary Policy, Unemployment | Permalink  Comments (11)


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