if we combine the costs of idle workers and capital during the downturn and the harm done to the US economy’s future growth path, the losses reach 3.5-10 years of total output.
That is a higher share of America’s productive capabilities than the Great Depression subtracted
Pointer from Reihan Salam.
Brad goes on to say that conventional macroeconomists know how to fix this, but the evil, heartless plutocrats will not let conventional macroeconomic policy be followed.
I am really struggling to follow his reasoning. I may be wrong, but I think this is how he arrives at the insinuation that what is taking place now is worse than the Great Depression.
1. If you graph U.S. output, the Great Depression shows up as a deviation from trend, but you get back to trend. From a a long-term perspective, there is an adverse shift in the timing of output, but not much in terms of permanently foregone output.
2. Assume that in the future, the U.S. is not going to get back to trend. When you cumulate this shortfall relative to trend, it will be really huge.
If I have this right, then my comments would be:
a) it is the assumption of no return to trend that drives the calculation of such a large loss. The cumulative loss would diminish considerably under an assumption that we do return to trend.
b) if we are not going to return to trend, then it seems to me that Brad has to explain why this does not constitute a supply shock. The conventional macroeconomic theory says that permanent phenomena are supply shocks, not demand shocks. I realize that Larry Summers has floated the idea of “secular stagnation” on the demand side, but if this has already become a generally accepted thesis then I missed the memo.
c) Brad’s political economy appears to assume that rich people knew that we were suffering from secular stagnation five years before Larry did.
One of the points that I emphasize in my book (which is almost finished, by the way), is that the last few years we have seen a lot of on-the-spot macroeconomic theorizing that differs considerably from what was taught prior to the crisis. That’s fine. We need it. If you feel like stoning to death DSGE models and their kin, I’m happy to join in. But by the same token, I believe that new, outside-the-box thinking has to be marketed as tentative and speculative, not as scientific truth that only the evil or ignorant would deny.
To pick one charitable point out of this mess, it sounds like a core part of DeLong’s perspective is that in the long run, growth conquers all. If you think the world has a hundred years of exponential GDP growth in it, then the only policy that matters is how to make that exponent large and to make it happen now rather than later.
Anyway, I agree about the odiousness of blaming it all on rich people. How has so much of modern thinking come to be captured by American political spats and class warfare?
Seven years with no return to trend is a long time. Progress was made in the 30s until set back in 37 and progressed from there again, but it was never really closed until the war. See a war on the horizon? In contrast we have no closure and even some relative deterioration recently. Yes, conventional macro is suffering its dark ages which include the idea that demand shortfalls can’t persist. No doubt someone out there would also insist the Fed setting interest rates at 20% and leaving them would cause inflation to rise to that level too since obviously the economy will always correct itself if left alone.
“even some relative deterioration recently”
I hope that doesn’t look, in hindsight, like the understatement of the year.
So, let’s start he discussion early. What will be the dollar figure for what isn’t considered too little intervention?
Have we started the countdown for Brad DeLong to leave a vague, yet condescending comment here in response?
Did I miss the paper that proved trend was destiny?
Back in 09, DeLong and Krugman both sneered at Mankiw for suggesting that the economy might not snap back to trend. I suppose that their model suggests that but for the parasitic economic overclass, it would have snapped back, but presumably they knew about the existence of a parasitic economic overclass back in 09 and should have included it in their model.
http://krugman.blogs.nytimes.com/2009/03/03/roots-of-evil-wonkish/?_r=0
http://delong.typepad.com/sdj/2009/03/permanent-and-transitory-components-of-real-gdp.html