May 12, 2023
Economics famously suffers from a “which way is up?” problem. The issue is whether an economy is suffering from too much demand or too little demand. On its face, that seems like it should be a very simple question, but in fact it can be complicated and people often get it wrong, with very serious consequences.
The Great Depression was the classic too little demand story. We had millions of people out of work through the decade of the 1930s because there was not enough demand in the economy. With the benefit of hindsight, or a good Keynesian understanding of the economy, this demand problem is very clear, but it did not seem that way to many people living at the time.
Most immediately, people saw families who didn’t have food, adequate clothing, or housing. That looks a lot like a problem of having too little of the things that are necessary to meet society’s needs.
But the reality was the opposite. We know this for certain because once the government spent lots of money, the economy was able to meet these needs and considerably more.
Unfortunately, it took World War II to provide the political will to get the government to spend the money needed to get the economy back to full employment. But, if we had the political will to spend the money, we could have ended the depression in 1931 instead of 1941. The key point was the need to spend lots of money; it didn’t have to be spending on a war. (This is why all the talk of a Second Great Depression around the 2008-09 financial crisis is so silly. We know how to spend money. That’s all we need to do to avoid a Second Great Depression.)
We have had many other instances of too little demand in the last 80 years, most obviously in the Great Recession and the slow recovery that followed. If we had a larger stimulus and more government spending in the years following the Great Recession, the labor market could have recovered more quickly, bringing us back to full employment years earlier, although we did finally reach something close to full employment in the year just before the pandemic.
During the pandemic we did see the opposite problem, where we had too much demand. This was due both to the fact that support packages the government used to keep people whole (enhanced unemployment benefits, the Paycheck Protection Program, and the checks) put a lot of money in people’s pockets, and that the pandemic itself crippled supply. The strong demand, coupled with the reduction in supply, gave us the burst of inflation in 2021-22 that is now receding.
David Brooks Struggles with the Problem
Okay, so now that we know the players, let’s look at how David Brooks struggles with the problem in his column this morning. Brooks tells readers about the “second phase” of Biden’s presidency.
“Today, its main purpose is to prepare the nation for a period of accelerating and explosive change. ….
“The information age is accelerating and growing more disruptive. The first cause is artificial intelligence. A.I. will produce pervasive breakthroughs and threats that none of us can now predict. Another cause is the emerging cold war with China. This will produce a remorseless technological competition that will turbocharge developments in biotech, energy, chip manufacturing, trade flows, political alliances and many other spheres.
“We’re living in the first stages of what my colleague Thomas Friedman a few years ago called ‘the age of acceleration,’ an age of both stunning advances and horrific dislocations.”
This is all very dramatic, but the basic point here is that Brooks is telling us that we are entering an era of rapid technological change. That means rapid productivity growth. AI and other technologies will allow us to produce much more output for each hour of work. This means that the economy should be able to produce much more in the years ahead than it does today.
That raises the risk that we will have too little demand. Workers laid off as a result of AI and other technological developments may not get re-employed. The government will have to provide generous benefits and/or increase spending in other areas to keep the economy near full employment.
I’ll confess to some skepticism about these claims of a technological revolution (we’ve been hearing them for three decades now), but this is at least a clear story. Technology will revolutionize the economy and make it far more productive than it is today.
But then Brooks takes a U-turn and tells us that we have to worry about too much demand.
“We’re going to need governments that are able to pivot quickly and throw tidal waves of money at suddenly emerging problems, from technologically driven mass unemployment to war in the Pacific.
“When Covid hit, the United States successfully pivoted and threw trillions of dollars at that problem. But the United States may not be able to mobilize that kind of response in the future. That’s because we’re now manacled by debt. …..
“The United States is projected to spend roughly $640 billion this year merely paying interest on that debt, a figure that is expected to more than double by 2033. That’s about the time the Social Security Trust Fund will become insolvent, requiring even more gigantic cash infusions to keep the program going.”
Brooks is very explicitly describing an economy where we would lack the ability to produce the goods and services necessary to meet society’s needs. This is 180 degrees at odds with the story of the “age of acceleration,” where technological breakthroughs are making us hugely more productive.
If the economy is transformed in the way Brooks is predicting, there is no reason the government couldn’t spend whatever money is needed to accommodate the transition he is describing. We need not be worried about inflation if a technological revolution is causing huge reductions in production costs and there is an enormous amount of excess capacity in the economy.
Will the ratio of debt to GDP rise? It could, although it is hard to say for sure, if GDP were to rise rapidly as Brooks seems to expect. But suppose the ratio does rise; so what? Japan has a debt to GDP ratio of 250 percent. It has been trying to raise its inflation rate for two decades. The interest rate on its long-term government debt is near zero. Where’s the problem?
Keeping Our Horror Stories Straight
To be clear, I am skeptical, but hopeful, about Brooks’ technological revolution. AI and other technologies could lead to an acceleration of productivity growth. But, if we do see the revolution that he and his colleague Thomas Friedman seem to expect, then we do not have to worry about debts and deficits.
Those are concerns for an economy with slow growth, where too much demand really is the problem. If the economy’s productive capacities are going through the roof, there is no need to worry about how it will pay for my Social Security.