*The Age of Oversupply*

That is Daniel Alpert’s book and the subtitle is Overcoming the Greatest Challenge to the Global Economy.  I found this a fun and interesting read and I agreed with more of it than I thought I would.  I’ve stressed numerous times that some of the dilemmas of our current day can be understood through nineteenth century parallels and also through the writings of the classical economists.  So why not pull Thomas Chalmers and Malthus out of the closet and worry about a general glut of goods and services, juxtaposed with Bernanke’s global savings glut, and a dash of MMT at the end for good measure?  The more the merrier, I say.

Here is one representative overview passage from the book:

The supply of global labor and capital is too great, and demand too weak, for them to resume proper functioning without proper assistance.  This imbalance has been going on for years and nobody seems to know what to do about it.  Private markets haven’t solved the problem, not because they are inherently dysfunctional, but because the sheer magnitude of changes in the global economy, thanks to the fall of the Bamboo and Iron curtains, has created challenges too big for private markets, acting alone, to reasonably address.

I like the integration of the international dimension, but I do have some worries:

1. The book too often lapses out of its international context and falls into standard Keynesianism.  I don’t mean to prejudge against that approach, but we’re already pretty familiar with it and it doesn’t justify another book to spell it out.  The author should have spent more time in the nineteenth century, in China, or both.

2. Good infrastructure selection, as the author proposes, could boost growth but it won’t undo any general glut that might exist and it won’t help current unemployment a lot.  Those are not the workers who would end up being hired to build the new projects.  Rather than closing the book with policy prescriptions (always a downer in a trade book), the author should have spelt out a vision for where all this is likely headed.  In any case, we’re unlikely to spend another $1.2 trillion on infrastructure over the next five years, so what happens then?  Can we depreciate our capital stock back into a more dynamic recovery?

3. Even when I agree with Alpert, I don’t think “oversupply” is what he is pinpointing.  Like Krugman’s recent flirtation with demand-side secular stagnation theories, it is an embarrassment for these views that current nominal gdp is considerably higher — more than ten percent — than its pre-crash peak.  The price level is higher too.  On p.135 Alpert recognizes this problem and even mentions that his own theory may have predicted as much as six percent deflation, which of course isn’t there.  He doesn’t have a good explanation on this point and yet it is critical to his overall framing (though not to each and every particular argument).

Yes, I know, many wages won’t fall in nominal terms and that limits price deflation.  But it won’t get you the increase in nominal values we have observed, the wage truncation hypothesis has theoretical problems, and also it is failing recent empirical tests.  Arnold Kling considers some recent research on the Phillips curve (pdf) and finds it can’t explain why the rate of inflation remained as high as it did, given the recession we experienced.  Or take a peek at the recent empirical study by Coibion, Gorodnichenko, and Koustas (pdf, interesting on several counts).  They find, to put it bluntly: “Hence, there is no missing wage disinflation puzzle to match the missing price disinflation puzzle.  This strongly suggests that downward wage rigidity is unlikely to be the key factor underlying the missing disinflation of the Great Recession.”  In other words, that whole line of explanation seems to fail and that is going to mean no general glut of goods and services.

Still, I am happy I bought this book.  Bravo for the nineteenth century.

Addendum: Alpert replies by email: “As to the price level and wage rigidity – I imagine we have differing views on what is supporting both.  I believe I make a reasonable argument that easing has kept financial asset value (incl. real estate) from falling, and that wages haven’t fallen because, ex-Japan, the labor oversupply has been absorbed via high levels of underemployment in advanced economies, rather than by wage reductions. Put it all on a per-capita basis and have another look at aggregate wages.  Prices, of course, have fallen in the tradable sectors. And but for rents (incl. owners equiv) (protected by monetary easing), and healthcare and education (guild industries with extensive price interference from third party payor systems), we would not have price stability since the beginning of the great recession.”


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