Scott Sumner on demand-side secular stagnation

It seems to me that the Krugman/Summers view has three big problems:

1. The standard textbook model says demand shocks have cyclical effects, and that after wages and prices adjust the economy self-corrects back to the natural rate after a few years. Even if it takes 10 years, it would not explain the longer-term stagnation that they believe is occurring.

2. Krugman might respond to the first point by saying we should dump the new Keynesian model and go back to the old Keynesian unemployment equilibrium model. But even that won’t work, as the old Keynesian model used unemployment as the mechanism for the transmission of demand shocks to low output. If you showed Keynes the US unemployment data since 2009, with the unemployment rate dropping from 10% to 6.1%, he would have assumed that we had had fast growth. If you then told him RGDP growth had averaged just over 2%, he would have had no explanation. That’s a supply-side problem. And it’s even worse in Britain, where job growth has been stronger than in the US, and RGDP growth has been weaker. The eurozone also suffers from this problem.

The truth is that we have three problems:

1. A demand-side (unemployment) problem that was severe in 2009, and (in the US) has been gradually improving since.

2. Slow growth in the working-age population.

3. Supply-side problems ranging from increasing worker disability to slower productivity growth.

I agree completely, his post is here.  And on labor turnover, don’t forget Alex’s earlier post here.

Comments

So if it's a supply-side problem, where's the inflation?

To be fair, only two of the three are supply side, the first is a demand issue. Fewer people in good jobs buying less stuff.

My view - it is impossible to compare the size of an economy filled with people using smart phones to surf porn (or maybe read a newspaper) and an economy of people all watching the same tonight show on NSTC flickerama. The consumption mix in western world economies is very different to what they were 20 years ago. But we are trying to use the same tools to measure them, and then arguing the differences to a few percent. What I will bet is that lifestyle of 20 years is perfectly doable today for a lot less money than then (though the low res TV might be a challenge to find). But who wants to live with 1990's tech, house size, cars, medicine and entertainment technology?

Debt is buy now, pay later. Today's demand was consumed in the prior decade.

Today there is a supply and a demand problem. The demand problem is too much debt; people already bought stuff and need to pay for it. On the supply side, the supply was built to fulfill the debt backed demand. Now it's the wrong supply for the market. The supply isn't changing rapidly because the debt keeps extinct firms alive.

If you inflate away the debt, say gold $5,000 an ounce, then you get the big inflation because the supply constraints will be exposed. Keep the debt overhang and the ossified supply and deflationary collapse remains a constant threat.

Well there does seem to be a grain of truth in this classic paradox of thrift explanation for recent slow growth. US household debt growth has experienced a significant reversal since 2008. Perhaps it really is a simple as that;

http://www.mymoneyblog.com/charts-credit-card-debt-and-household-debt-trends.html

Can anyone explain what @Daniel is blathering about?

He seems to be an ass.

Daniel's point--which is a correct one--is that it's simply wrong to think that you can "pre-consume" demand in Year 1 through debt that takes away demand from Year 2. It's a weird idea, like demand is some tangible thing like a cake, and if you eat a slice today you can't eat it tomorrow.

8 seems to have this naive assumption (which is common amongst internet libertarians who have never taken an accounting class) is that debt and money are a finite thing, and once you reach the limit there's nothing you can do but tighten your belt and suffer. I suppose someone who has only had to balance the family's checkbook could see the world this way, but anyone who's taken a class in accounting, finance, or macroecon (over 101, which often teaches some frankly bizarre shit when people transpose its simplicity-for-demonstration assumptions onto the real world) knows that debt is just the opposite of credit, and going into debt to buy things in 1999 doesn't have any significant connection to aggregate demand in 2009.

+1 You might also add that a non-use of an asset--human capital--reduces its value in a future period and that there are transaction costs associated with unemployment and reemployment.

Thanks for your kind words, Bill.

That's an interesting idea--I wonder if any studies have been done on this. It isn't something I hear about from economists, but it makes a lot of sense: greater unemployment will be a deflationary pressure because it reduces the price employers are willing to pay for human capital while also raising externalized costs that the government bears (through UI, food stamps, etc.) and that the unemployed bears. The result is higher government debt, lower aggregate demand--but constrained corporate costs. Which is exactly what we've seen consistently since 2008--more consistently than any other trend, in fact.

Since the pool of unemployed keeps growing and wage stickiness necessarily subsides, it seems like a very good time to begin a labor intensive business, n'est pas? So when are you going to do so?

You have a dizzying intellect.

I'm not even going to attempt to counter that. It makes as much sense to me as someone saying "since the sky is blue the leperchauns will naturally start dancing so it's a good time to order pizza? So when are you going to call Pizza Hut?"

When the first settlers in Maine saw all the trees they decided to cut them and make lumber. When you're aware of people that want to work, why wouldn't you come up with something for them to do? Of course, in reality, no one wants to work, that's why they go to college, so they won't have to lift anything heavier than a ballpoint for the rest of their life, never get sunburned and won't smash any of their fingers. What they actually want isn't a job, it's money, which is why retirement is such a big deal, it's income without showing up for work.

Michael. Welcome. You're an asshole. You're also wrong.

the pool of unemployed keeps growing

Unemployment has been falling for quite some time. Slowly but surely.

wage stickiness necessarily subsides

NGDP has been rising. Slowly but surely.

So you're an idiot who refuses to update his priors in the face of evidence. A moron, a true star.

If everything's OK, then what's the problem?

All the more reason to go for an expansionary monetary policy.

So if Jim and Suzy buy a new Subaru in 2012 financed for five years they'll likely buy another one in 2014? The US per capita consumption of oranges (according to the WSJ) has fallen 45% since 1998. Should the Fed enpixelate money in the hope that it will be spent on oranges or just issue coupons for juice to single moms? Or should the White House require two glasses each morning for every student at every American school?

" anyone who’s taken a class in accounting, finance, or macroecon"
Hey, the guys that haven't taken those courses, the guys that lay bricks and butcher pigs and drive trucks, don't determine economic policy, they just have to live with it. All that stuff is determined by people who HAVE taken those courses.

so if there's no limit to debt... then what

Then you'll have to find something else to worry about, I guess.

So if, say, my country borrows $500 billion from another country in order to consume something today, and pays it back with interest over the next 15 years, my country's aggregate demand over the next 15 years will be unaffected?

For the most part, yes. The thing you're forgetting is that the country (if it isn't in the eurozone) is borrowing $500 billion but it can also create that $500 billion out of thin air. It's like if I said I want to borrow 500 pieces of paper with my signature on it from you, and I'll give you 510 pieces of paper with my signature on it back to you in a year's time. All I have to do is sit down and sign 510 pieces of paper to pay you back.

Money is not finite for governments, even if it is for you or me.

Say it is $500 billion borrowed by the residents of one country from the government or citizens of another, on the same 15 year repayment schedule. Wouldn't that impact future aggregate demand?

Lol what happens when the country lending the money realizes its getting bamboozled by a bunch of double talking money printers and will never recoup its investment in goods and services

BTW thanks to Daniel, whose jerk off comments got deleted and screwed up the comment threads

OK, so you're into John Law and modern monetary theory, money as a token, legitimized because it's what the government accepts for taxes. But, somehow, this didn't work out for a number of sovereign states that had the ability to print their own money, Argentina, Weimar Germany, Mexico, the Confederate States, Zimbabwe, and so on.

all money today is token money basically backed (or 'legitimized') by the legal taxing power of governments. So your argument that 'it didn't work out' is pretty stupid, isn't it.

I'll give you $200,000 in Confederate money for your house.

As I said, all money today is token money' backed by taxation. All over the world. Rather than it 'not working out', it has actually achieved total global domination.

Idiot.

What if that money is invested (like, in education, health and transportation) instead of "consumed"?

Except that for someone who bought a house in 2005 or 6 they are stuck no matter what some theory says. The economy is an aggregate of individual decisions, not some economic model on a computer. There are many who have their only asset still illiquid, who have do defer purchases, cut their consumption or stick with a job because they would lose personally an amount that take half a working life to accumulate.

The Federal Reserve has been focused on two things; maintaining the value of the assets upon which the financial system is leveraged, and maintain low borrowing costs for the government debt by purchasing Treasuries, keeping interest rates low and essentially removing the cost of about a quarter of the debt. They to are stuck. Inflation has already happened when housing and asset prices rose. They have been determined to maintain those prices as much as possible, otherwise the asset deflation would cause a catastrophe.

There are some exceptions in the economy that are characterized by resource development or manufacturing based on econ 101 stuff such as low energy costs due to low natural gas prices due to investment and innovation in energy extraction technologies.

All these economic theories are an attempt to gain some insight into how economic activity happens. No more no less. Economists can't teach the bird to fly, it does it already.

thank you, Michael - you're a far more patient man than I am

I slept well last night, that's all. Usually I make comments just like yours!

Only in a limited sense can higher consumption today require lower consumption tomorrow. Consumption today means that resources were not used for investment that could produce consumables tomorrow. Cutting expenditures whether public or private does not generate revenue to pay off the debt unless the financial system is working well enough to shift all that non-consumption into investment -- practically a definition of "recession."

"people using smart phones to surf porn (or maybe read a newspaper)"

Is there even a difference any more?

If there has been a leftward shift in the long run aggregate supply curve and the central bank is targeting inflation, would we expect an increase in inflation?

Five-year 5-yr forward expected inflation has returned to pre-recession levels. Forward real rates were actually quite steady (not declining) from 2004-2011, with a short-lived but large dip and return to normal around the 2008 financial crisis. Since 2011, forward real rates have been about 1% lower than 2004-2011 (and also less steady). There was also a short-lived spike in inflation in 2011, which a lot of people seemed to have forgotten about. This all seems consistent with a gradually improving demand side (inflation expected to return to normal) with a long-run supply problem (lower forward real rates), *possibly* starting in 2011.

I say "possibly starting in 2011" because long-term nominal rates have been declining for decades. I only have forward inflation expectations data, however, starting in 2004, so I can't determine whether the pre-2004 nominal decline was due to declining inflation expectations or declining real rates. Thus, it's hard to tell whether the post-2011 decline in real rates is a new phenomenon or a continuation of a decades-long decline, which just happened to pause from 2004-2011.

Good point Noah.

I think it's one of those cases where supply and demand are strongly coupled, but the real reason has nothing to do with technology, aging work forces or anything like that. It's a consequence of larger economies being more likely to occupy their lower growth states ...

http://informationtransfereconomics.blogspot.com/2014/09/the-great-stagnation-information.html

I don't always focus on supply side problems, but when I do, I think of Casey Mulligan.

Maybe the government-elects-a-new-people system isn't working out economically as well as it was supposed to?

Quick, there's a brown-skinned bogeyman under your bed.

"Supply-side problems ranging from increasing worker disability..."

Is that a joke? Any sane person would guess that there is less demand for these "disabled" workers.

You beat me to it.

On what planet is increased worker disability a supply-side problem? Worker disability is given out because UI doesn't last forever and an increasing number of workers can't get jobs, which in turn is making them consume less due to lower income from SSI rather than a real job.

If there were demand for those "disabled" workers they would be in those jobs. The late 90s showed us that people will come out of the woodwork (and retirement) if the jobs are there and are beckoning with high wage scales.

No, the joke is that unemployment "has been gradually improving" since 2009.

People have stopped looking for work. That is not improvement.

This +100, we've only cracked +200,000 jobs a couple times since then, most of the time we've barely or not even been keeping up with population increases.

Data is the best thing here. Employment situation is still not very good but I typically read Calculated Risk (http://www.calculatedriskblog.com) for data on participation rates and the monthly jobs data. Actual numbers direct from the BLS, and useful commentary as well.

Looking at one of their recent charts, the economy added >200,000 jobs per month in _19_ months since January 2011 - that's 19 out of 45, or a bit less than half. And I didn't count the 3-4 months that looked to be be right at 200,000 cuz I'm not sure they aren't actually 190,000+. I was only looking at the graph, I couldn't find the chart data in my quick check.

You can see the chart in this post:
http://www.calculatedriskblog.com/2014/09/august-employment-report-142000-jobs-61.html

August was the first time in 6 months that the number was less than 200,000.

He also points out that:
Employment is now up 2.48 million year-over-year.
Total employment is now 753 thousand above the pre-recession peak.

And here's an interesting post on whether the decline in participation rate is structural or cyclical…worth noting that the participation rate has been mostly flat this year (2014).

http://www.calculatedriskblog.com/2014/09/research-much-of-recent-decline-in.html

My own non-scientific solution is that the Feds should starting putting $100 per month into everybody's (with income below a certain threshold, and since this is purely non-scientific, I am going to say those with household incomes before $50,000) bank account or EBT card.

2% GDP growth is pretty good and unemployment is falling because of ppl dropping out of labor force. neo Keynesian failed, as many in 2009 predicted it would. Any post-2008 economic gain can be attributed to supply side policies

New jobs are also being created.

So if someone is falling from the second story and I try to catch them, breaking their fall, should their broken arm convince me that the effort to break their fall was futile or that they would be dead if I hadn't broken their fall?

You logic is similar to the suggestion that they would be better off had I not tried to break the fall.

If it were that clean cut a causal relationship as your analogy suggests we wouldn't be having this discussion.

"Extremely talented conservative economists"? Is that equivalent to army intelligence. I share Sumner's distaste for Krugman's habit of ridiculing those who disagree with him. I learned as a parent that guilt and shame are ineffective methods for behavior modification; Krugman's tribe uses shame, my tribe uses guilt, both equally ineffective. Of course, this economic crisis is different, triggered as it was by a financial collapse even worse than the 1929 financial collapse (in the latter it was many smaller financial institutions that failed, whereas in the former it was the few giant financial institutions that would have failed absent intervention by Paulson, Geithner, and Bernanke). Financial instability is at the core of this crisis. In Krugman's defense, he's fully aware that this time is different, but his focus is on short-term measures (the demand side) that address the immediate crisis (high unemployment, low output), deferring action on the larger problem of financial instability. To Summers' credit, his view has evolved, from that expressed in his Okun Lecture (what I would call the hidden inflation theory) as the financial crisis was unfolding to the more complex secular stagnation theory expressed today. Two new books (Seven Bad Ideas by Jeff Madrick and The Shifts and the Shocks by Martin Wolf) take aim at the failing of economists in this crisis, the book by Martin Wolf expressing the view that the failing is setting us up for a far worse financial and economic collapse. As I said, this time it's different. The failing is that too many economists have their theories and they intend to stick to them regardless of the evidence.

Paragraph 1:

Where are the links to the places you claim Krugman/Summers made these claims? Are these the complete claims, if they are. It makes it easier to say, later in the post, "The truth is we have three problems" if you only list one position as that of your opponent.

Paragraph 2: Second, did you realize you created a straw man in point 2 by starting with the statement: "Krugman might respond to the first point by saying...." and then go on with what they might say.

Its funny to see these argumentation techniques done by an economist. Claim to summarize a persons views in one paragraph, and follow by a straw man.

Let's get this straight. The economy is unsatisfactory in that large numbers of people don't have jobs or income and thus can't use that income to buy things that would be made by people that are now unemployed for lack of demand. It's up to economists, or some subsection of the economist community, to come up with plans to be implemented by government to alleviate this problem. The economists with the most visible platform present their theories to the public, hoping that enough of those that can't balance their own check books will buy into their ideas and pass the acceptance along to the demi-gods in Washington, who will then enact long overdue legislation to make everything just wonderful again, with smoke pouring out of stacks across the rust belt and widgets dropping off the end of conveyor belts into cartons for shipment to big box stores everywhere. Is that it?

Well, no.

The problem is that the solution to get the economy fixed is very simple: expand the monetary base and start programs that increase money velocity. From this chart, you can see we have a problem: http://research.stlouisfed.org/fred2/series/M1V

If the problem is so simple to fix, why isn't it being fixed?

Because the fix would weaken the position of creditors, who ultimately control the U.S. As was recently proven, the U.S. is an oligarchy: http://www.bbc.com/news/blogs-echochambers-27074746

After years of technological improvements and a lot of hard work, our capital stock is overflowing. We're obscenely rich. But we don't have sufficient money to chase the goods/services produce. Hence disinflation and deflation. The solution is to print more money to catch up with the shiny buildings and neat-o apps we've made. But that would benefit you and me, not the Koch brothers.

DeKrugman is clearly one of the influential people who lets the Fed off the hook - and I don't think he's on the Koch brothers' payroll.

True, but Delong and Krugman have both publicly said the Fed should've increased the money supply more. Part of the reason they didn't is right-wing hysteria about teh inflation.

Yeah, they said the Fed should've done more, but somehow couldn't because of the magical ZLB.

They're part of the problem, just like the right-wing goldnuts. In fact, pretty much the entire macroeconomics profession was caught with its pants down.

When push came to shove, the textbooks went flying out the window and everyone went with his/her gut feelings.

Money isn't printed anymore, it's enpixelated. Beaucoup dinero has been enpixelated, trillions in the last few years. So why isn't it solving the perceived problem?

Chuck, the answer is threefold: 1. the money isn't going onto anyone's balance sheet other than the Fed's and a few creditors who aren't lending; 2. it isn't enough (especially true in Europe); 3. Monetary expansion hasn't been expansionary because it's been counteracted by fiscal policy that has been contractionary.

"Trillions" sounds like a lot, but it isn't nearly as much as needed to chase all the shiny new buildings made in the 2000s, the mobile apps, the websites, the blog posts like this, the automated vacuum cleaners...

Chuck,

It's M*V = P*Y, not just M. And V isn't fixed, in fact it has fallen quite a lot.

And why hasn't it solved the problem ? Let me use a metaphor.

Say you're at a party. And it's a really lame party, nobody's having any fun. So the host comes out and says "here, have all the alcohol you can drink - but as soon as somebody get drunk, I'm taking it away from you". Unsurprisingly, the party continues to be lame, much to the host's dismay, who starts complaining - "I gave them all the alcohol they wanted, why aren't they drinking ?".

We have been having an expansionary monetary policy, and it has not been enough to change expectations of inflation. What we need is a temporarily expansionary fiscal policy.

The "unemployment rate" is not indicative of much of anything, because in the US, the unemployment rate goes down when people stop looking for jobs. Sumner's #1 seems to posit that the unemployment rate is indicative of the demand-side situation.

A better indication of what is going on is the employment-population ratio (which, inverted, is a better idea of unemployment). This plummeted at the crash and has been nearly flat since then, for a variety of reasons. Here it is for all civilians:

http://research.stlouisfed.org/fred2/series/EMRATIO

Here it is for 16-to-19 year olds (in case you might think that the problem is early retirements by the Baby Boomers due to the bad economy). This following graph is going to cause problems for the next 50 years, resulting in lower lifetime incomes and more necessary social spending. Economists of all stripes should look at this graph, and hang their heads in shame:

http://research.stlouisfed.org/fred2/series/LNS12300012

We have been having an expansionary monetary policy

By what indicator do you judge the stance of monetary policy ?

Daniel: "By what indicator do you judge the stance of monetary policy ?"
By the first graphs of Monetary Base, Reserves, M1, M2, M3 from this page:
http://research.stlouisfed.org/fred2/categories/24

By the first graphs of Monetary Base, Reserves, M1, M2, M3

Right. Let me guess - you also judge how fast your car is going by looking at the tachometer, right ?

What's that ? You don't ? Why not ?

Moron.

http://en.wikipedia.org/wiki/Velocity_of_money

It's M*V = P*Y, imbecile.

And what are the Fed's tools to affect the velocity?

what are the Fed’s tools to affect the velocity?

http://s1.static.gotsmile.net/images/2012/01/06/f7807a21-cant-tell-stupid-trolling_132580428869.jpg

I think I'm going to go with "very stupid".

So in other words you will not answer the question?

In other words, the very fact that you asked that question proves you're not smart enough to understand the answer.

But hey, I'll give it a shot. Suppose tomorrow the Fed makes the following announcement - "tomorrow we will double the monetary base and it will be permanent".

What do you think will happen ? My guess is that people will start spending money as soon as that announcement is made. That is, before the Fed actually did anything.

What's the term economists use for this thing ? Oh, yeah - EXPECTATIONS.

So yes, the Fed has plenty of ways to control velocity.

Moron.

Unfortunately for your theory, the great majority of households do not own any assets except their houses, and the great majority of people are not holding onto any excess cash.

The inflationary expectations of almost all people will be that the prices of goods and services will increase, without a corresponding increase in their paychecks.

predictably, you're a moron

oh well, I tried

Sorry, slander won't get you off the hook. You wrote, "My guess is that people will start spending money as soon as that announcement is made."

Your guess is largely incorrect. Your guess can only apply to a portion of the population which is small. And that portion won't increase expenditures enough to make much difference, because they already have most everything they need. They would want to buy inflation-protected assets instead, expecting the nominal interest rate to go up. The textbook theory of expectations applies to them only.

The vast majority of people will react quite differently, because they do not receive income in excess of personal necessities plus debt repayment. They will expect the real value of their houses to go down. They will expect to not be able to by food and gas shortly. They may REDUCE current spending now, so they can continue to put food on the table when the price goes up.

The most likely short-term outcome of your idea is thus political panic and a reduction in nominal GDP.

Now, it may come to the same conclusion as the present path over the very LONG term, because inflation also reduces the real burden of existing debt, plus, an increase in interest rates makes it worthwhile for creditors to lend.

Are you 15 years old?

you are completely retarded. no, really.

and because you're really dumb, you fancy yourself to be pretty smart. which is typical for stupid people.

but rest assured, you are not smart.

Unfortunately for you, insults do not win arguments. You lose decisively.

That's not the full story, either, Michael. Governments have not been applying standard microeconomic investment optimization as they ought in a recession. A fall in long-term interest rates ought to lead governments to invest in projects with positive NPV's that were not positive at higher rates.

That's what I meant by "start programs that increase money velocity."

In the future can you put your Koch brothers reference near the beginning of the post so I can stop reading and save myself the 5 minutes before dismissing anything you have to say?

I don't think it's quite like that.

How I see it - economists don't care much about actually making the world a better place, but they do care about status. So they fight among each other to rise in status. And the ones at the top are the ones whose voice matters in important places (like the Fed).

Right now, the clearly winning coalition is the Keynesians - who seem extremely content to apply gold standard theories to a flexible exchange rate regime. And when reality insists on falsifying their theories - well, reality can take a hike. And so the Fed does nothing to end the recession.

The Fed can only do a couple of things, enpixelate money or delete it and put price controls on interest rates. They don't come up with cures for hayfever, cruise ship itineraries or blueprints for shopping centers. They can't make people invest in projects that don't make any sense or buy stuff that they don't need or hire people that can't produce anything.

You don't quite get what this whole "aggregate demand" and "stickiness" implies, do you ?

Let me ask you this - what exactly changed in 2008 that made so many economic projects stop making sense ?

Things were humming along just fine, and then WHAM - projects stopped making sense, people realized by the millions all at the same time that they were buying stuff they didn't need - and they all went on vacation !

And yes, I realize I'm wasting my breath on you.

Obviously, things weren't "humming along just fine".

Overbuilding houses funded with foreign capital, hot money, GSE lending and securitization of opaque and systematically risky vehicles is "humming along just fine"?

The Great Recession boils down to a leverage cycle that has displaced demand for many years.

Again this weird assumption that demand is some tangible thing that can be moved around like a piece of cake.

You seem to have this naive assumption (which is common amongst internet libertarians who have never taken an accounting class) is that debt and money are a finite thing, and once you reach the limit there’s nothing you can do but tighten your belt and suffer. I suppose someone who has only had to balance the family’s checkbook could see the world this way, but anyone who’s taken a class in accounting, finance, or macroecon (over 101, which often teaches some frankly bizarre shit when people transpose its simplicity-for-demonstration assumptions onto the real world) knows that debt is just the opposite of credit, and going into debt to buy things in 1999 doesn’t have any significant connection to aggregate demand in 2009.

money and debt are a representation of finite resources

money and debt are not fixed in quantity, imbeciles

It's not up to economists to figure out how to employ people. But they can contribute to discussions of how private and public organizations may behave within various environments as we continue on the endless political discussions of where we want to go and how we want to get there.

Although supply side problems could be the reason for slow growth since 2008, it seems like we cannot reject the hypothesis that the problem is demand.

Rapid growth per "working age" person would not count as "stagnation" in my lexicon. And how much decline in participation is due to trouble finding a job?

Low growth in output per worker does not show whether the low growth in the numerator is due to demand or supply constraints.

Only higher inflation with no higher real growth will "prove" that we have a supply side problem. And wouldn't that be a more propitious environment to tackle things like occupational licensing, farm and ethanol subsidies, NAMBY objections to infrastructure investment, even moving from income to progressive consumption taxation?

Neither fiscal or monetary policy looks right to me.

A Krugman impressionist

Recovery from the great depression was investment led. And investment in human capital was one of those forms -- high school graduation rates increased considerably. The lack of investment in education is another difference between the Great and the Lesser Depression.

Maybe Matt Yglesias was right that the true bubble was the labor force participation of 69.+% in 2000 in which it took eight years to pop with the fall in housing prices. Isn't a lot of the drop in labor force simply a lot of former over-stressed two income families becoming an economizing single income family as they can no longer live the lifestyle of 24-7 and run a family. (Hasn't the increase of home schooling increased greatly...Wonder if economist call it "Home School Revolution") Also the birth rate has not dropped more because women over 35 are having more children.

My guess is half the drop in the labor force is discouraged workers that might come back and the other half willing dropouts to focus more on families. (I see the increase in part time workers coming from second income families that work around their 2 - 3 children schedules.

If Yglesias said this, then I finally found something of his I can agree with. But there is no need to see this as the "true" or sole source. Those people were retained in the labor force because their rewards were paid for by poorly managed debt.

Why is it so hard to believe there was a confluence of factors and no single bullet theory? It may help the weak minded to focus attention on their favorite scapegoat, but it doesnt help us prevent the next crisis (which I believe is brewing now).

good to see you're still a moron

Have you considered jumping in front of a fast moving tractor-trailer?

have you considered not being a moron ?

When you have gutted the demand side of the economy what emerges are phenomena like Walmart where lower consumer prices are achieved through a monopsony (the private sector form of the "single payer" holy grail socialized medicine seeks for the same reason) that not only pays its suppliers less, but also its employees less because as the jobs market contracts, there is nowhere else to work ultimately. Walmart also knows EXACTLY what it is doing when it trains its employees in the art of extracting government benefits from a decreasing government revenue stream.

All of this wouldn't be so bad if the tax base were on net assets rather than economic activity as at least then the companies engaging in corrupt hiring practices --such as I witnessed during the huge ramp up in H-1b circa 2000 when I was told I could hire all the programmers from India for HP but not the single US-citizen specialist in the field that I needed -- will be dumped because the companies doing them will be put out of business by a more level playing field in the free market.

when you have gutted the demand side of the economy what emerges are phenomena like Walmart where lower consumer prices are achieved through a monopsony (the private sector form of the "single payer" holy grail socialized medicine seeks for the same reason) that not only pays its suppliers less, but also its employees less because as the jobs market contracts, there is nowhere else to work ultimately. Wal-mart also knows EXACTLY what it is doing when it trains its employees in the art of extracting government benefits from a decreasing government revenue stream.

All of this wouldn't be so bad if the tax base were on net assets rather than economic activity as at least then the companies engaging in corrupt hiring practices --such as I witnessed during the huge ramp up in H-1b circa 2000 when I was told I could hire all the programmers from India for HP but not the single US-citizen specialist in the field that I needed -- will be dumped because the companies doing them will be put out of business by a more level playing field in the free market.

A lot of this sounds like arguments to keep people working for scraps their entire lives by inflating their savings away constantly.

Lol what happens when the country lending the money realizes its getting bamboozled by a bunch of double talking money printers and will never recoup its investment in goods and services

Because in each of those cases, chuck, there wasn't a commensurate increase in capital stock.

I'm sorry, though--after reading your comments I realize there is no way of getting the concept into your head. I'm glad you're not my student.

I bet Chuck agrees with you on that last sentence; I would too.

Tbf I get your points about expanding the money supply and creditors not liking that, but that's the same thing you are saying governments are doing to each other. Seems like it can't go on forever

Great link, Tyler. Sumner knocks another one out of the park, and the MR comments section underscores the subtlety of Sumner's perspective, upon whose rocky shoals even many an Econ PhD reveals his ignorance.

Between Keynesians and gold bugs, Sumner still has a lot of work to do.

Sounds like things will be better if we only get one side of the argument. That's not a very sound basis for quality public discourse.

If you showed Keynes the US unemployment data since 2009, with the unemployment rate dropping from 10% to 6.1%, he would have assumed that we had had fast growth. If you then told him RGDP growth had averaged just over 2%, he would have had no explanation

The explanation seems pretty simple to me, He would have said we had tepid recovery from the depression's peak in 2009 due to a tepid implementation of Keynesian policies.

You then would have said something like, "OK Mr. Keynes, I showed you just two numbers...unemployment and RGDP. Not knowing any other info, I'll let you pick one other number for me to show you. Before I do, though, tell me what the number should show if your answer is correct."

"Well my good sir, show me inflation. If I am right, there should be little or no increase in inflation...possibly even negative inflation at some points."

Falling unemployment, stagnant wages, and slowish growth. Could it be anything other than people giving up on their job search?

so let me sum up what I think the key problems are with this post:

1. Unemployment has fallen, but inflation has not picked up. Unemployment is a metric that has to be read with other metrics. we all have heard about unemployment falling because people leave the job market or rising because people enter back in.

2. Demographics & supply side problems:

This would show up as a drastic decline in the labor force participation rate. Yet as you can see from this graph:

http://gonzoecon.com/wp-content/uploads/2012/01/LaborForceParticipationRate.png

The US still works today at a rate higher than the 40's, 50's, 60's or 70's. Perhaps in the future there will be a demographic based labor supply problem, but it isn't today nor should it impact today's GDP. There's plenty of people in the economy both to man the burger joints and the hedge funds.

Which really all goes back to the problem of how do you diagnose a supply problem when you haven't address the demand problem fully? How do you expect the plumber to tell you that you have no leaks when the water is shut off and there's no pressure in the pipes?

Sorry there is only one way to know how good or bad our supply side is. You have to push hard on the demand pedal and see where the engine red-lines. Keynes, like it or not, is the supply sider's best friend.

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