July 20, 2015
I see that Brad takes issue with my prior post arguing that the bubble-driven recession of 2001 and the more recent one in 2008 were really bad news which could not be easily escaped.
“You need to rebalance, but competent policymakers can balance the economy up, near full employment, rather than balancing the economy down. And from late 2005 to the end of 2007 the balancing-up process was put in motion and, in fact, 3/4 accomplished.
“There is no reason why moving three million workers from pounding nails in Nevada and support occupations to making exports, building infrastructure, and serving as home-health aides and barefoot doctors needs to be associated with a lost decade and, apparently, permanently reduced employment. A lower value of the currency can boost exports. Loan guarantees and burden-sharing can get state governments into the infrastructure business. A surtax on the rich can employ a lot of home health aides and barefoot doctors. If these roads were foreclosed, they were foreclosed by the laws of American politics, not the laws of economics.
“And the lack of successful and rapid rebalancing–the weak post-2001 recovery–was also, overwhelmingly, a matter of choice: to use tax cuts rather than infrastructure and other social capital-building forms of spending on the government side, and to direct the dollar earnings of foreigners selling us imports into funding house construction rather than buying exports on the private-spending side.”
I would agree with this mostly, but say that it misses the point. (I disagree on the 3/4 accomplished part in the first paragraph, but that is secondary.) We do not have a political environment in which we can run deficits of the size needed to correct large imbalances, nor can we address chronic trade deficits by getting the dollar down. For this reason, bubbles are really bad news because when (not if) they burst we lack the ability to address the resulting shortfall in demand.
This is really simply stuff and that is a big problem in dealing with it. Economists want things to be difficult as do the liberal billionaires who fund economic research and policy analysis. Rather than trying to figure out a way to try to make it clear that we have to get the government to spend money or to drive down the value of the dollar, we will see tens of millions spent on developing new economic theory. Oh well, at least it will help to stimulate the economy.
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