Friedman, Hetzel, and I all share the view that the private economy is basically stable, unless disturbed by monetary shocks.
Scott refers to this paper by Hetzel.
Very broadly, I place explanations of cyclical fluctuations in economic activity
into two categories. The first category comprises explanations in which real
forces overwhelm the working of the price system. . .
In the second class of explanations of cyclical fluctuations, the price system
generally works well to maintain output at its full employment level.
My own mantra is that all recessions are adjustment problems, and that adjustment problems are local. Do not think of the economy as one big GDP factory governed by the relationship between “the” wage, “the” price level, and the money supply. Instead, think of it as patterns of specialization and trade, with the sustainability of those patterns determined by profits. When patterns are disrupted by innovation or by changes in credit conditions, the economy must re-allocate resources. It takes time for entrepreneurs to figure out how to do that.
So, relative to Sumner and Hetzel, I am in the “other” camp.
By the way, in about a week, I should have up a review of Sumner’s treatise on the Great Depression, The Midas Paradox.
Are your views and Sumner’s necessarily in conflict? Your mantra is that ‘recessions are adjustment problems’, but isn’t the non-recessionary economy characterized by endemic adjustment problems, too? Fashions change, fads bloom and die — watch as a previously unstoppable ‘Krispy Kreme’ chain is dealt a blow by an unpredictable low-carb craze or as digital cameras destroy the film and processing industries or as Craigslist does the same for newspaper’s profitable classified ad business, and on and on — and yet economy-wide recessions do no necessarily result from any of these individual events.
Couldn’t one argue that the economy is ordinarily a ‘stable’ parallel, distributed processing system for solving adjustment problems? And if so, then doesn’t the question become — what causes adjustment problems to become severe enough to result in recession? One possibility, I supposed, might be a ‘rogue wave’ theory, where, by chance, several large adjustment problems occurring at the same time combine to ‘capsize’ the economy. Another might be that monetary shocks cause the normal adjustment problem-solving activity to break down. And then it seems like a combination is also possible (e.g. a rogue wave occurs that would be survivable except for crucial errors by central bankers in steering the ‘ship of state’).
I second slocum. For instance, quits, hires, and job openings collapse when NGDP growth drops. The best thing about stability is that it allows adjustment.
Persistent growth is associated with rising wages. These are widely and incorrectly seen as inflationary, but I think they are much more associated with real growth because the more “liquid” labor market allows the adjustments you are looking for since workers can test the market with less risk.
NGDPLT is the PSST monetary policy.
“I second slocum. For instance, quits, hires, and job openings collapse when NGDP growth drops. The best thing about stability is that it allows adjustment.”
This is a very large assumption, that quits/new hires are sufficient (nessecary/important) to PSST. It is easy to build a model where most employee movement is based on preferences that change through life (ie a traveling consultant moves to a local job when he gets married, and switches jobs again when he has kids and values a job with health benefits higher) but don’t reflect underlying changes in the economy.
Reading Kling his position is one where you need experimenting to find a sustainable pattern of trade, and it is again easy to suppose a line where stability inhibits these experiments (why take risk when the current setup grows at 2% in perpetuity?).
“Reading Kling his position is one where you need experimenting to find a sustainable pattern of trade, and it is again easy to suppose a line where stability inhibits these experiments (why take risk when the current setup grows at 2% in perpetuity?).”
But even when the overall economy is growing, some industries and regions still struggle and have the motivation to make changes and take the risks to discover new, more successful strategies.
I don’t understand this sort of thinking. Would we still have Polaroid and Kodak if we had eliminated recessions? Or alternatively, would we be more likely to have more Amazons, googles, and Apples if we had created more recessions in the 90s? This is ludicrous. It’s the broken window fallacy applied to risk management. It’s depressing that people as reasonable as you are drawn to ideas as bad as this. 🙂
The BWF is at its core that shifting around money creates wealth, which to my ears sounds far more similar to market monetarism than to PSST.
In terms of would we have more apples and amazons? Well during the last downturn both Amazon and Apple gained market share, and (iirc) both actually gained it at higher rate than they did during the expansion years of 02-06 (in terms of a % of what is left to gain).
The idea of selective pressures bringing about different changes based on the underlying growth rates is a basic concept in biology. Bottlenecks can be followed by explosive (and innovative) growth- we are fortunate (greatly fortunate) that we are alive when ideas and not individuals can be culled.
I third. I’ve been reading both your blogging daily since 2008 and I have to say that your positions seem pretty compatible. If we implemented a monetary policy acceptable to Scott, your PSST story would become the perfectly correct view of macro. Until then, you each diagnose separate halves of the problem. (Or mayb thirds with the interactions between them being another third.)
I guess this raises a question for you (Arnold). Assume we must have a Fed. How would you instruct the Fed to behave?
Part of Klings’ position is that recessions are necessary to the reorganization story. You can’t reconcile Scott’s views with Arnold’s because Scott thinks you can prevent those recessions from happening without hindering growth.
Could you define “local.” The US is the third largest country in terms of population so I would suspect that we would have a lot of “locals.” A smaller country, say Canada with about a tenth the US population would have fewer “locals.” For a country as a whole, one would think that the US would have fewer economy wide recessions than Canada. Or do I not understand what you mean when you say local?