We’re in for 5-10 yrs of penury, pain, injustice, polarization, unrest & possibly a kind of new Dark Age.
—Umair Haque, via Twitter
A frolic among the perspectives from the prognosticators of all things economic will yield a single, resonant theme. It won’t surface through facts and figures. Ranging controversies between the statistics will moot themselves in the face of it. Both left and right will agree, even while denying it. They’ll say, this time it’s different.
Ask Bill Gross or Peter Schiff. Surely the Heritage Foundation and perhaps the Brookings will also chime in. No doubt, a bleating chorus will rise to reinforce it from all sides of our bicameral incarnation of the people. The American economy has breached its balance. It’s no entropy that we face, but a new normal. Unemployment will remain intractable. The budget-busting entitlement programs will ruin us. And the shifting balance of global competitiveness will drive jarring and untold consequences upon our economy, culture and civilization. SELL!
Would it were so simple. If only we could find ourselves locked in the tight embrace of so many sophisticated arguments. As they might spill forth from one expert or another, how comforting would the simplicity of each argument’s successful grasp of reality be. Would they not, at the least, no matter how dour their outlook, give us some quiet comfort in our ability to define and grasp the outlines of all that drives us, not the least of which, economically? If a crisis is a terrible thing to waste, it must be the spark of realization that we would forfeit. And if we could catch that spark, if this time is different, then maybe there won’t be a next time for this crisis or another.
Unfortunately, as Carmen Reinhart and Ken Rogoff have shown, it’s not quite so easy. Like the many times before it, this time is actually somewhat similar to many other crises consummated and from which we and many others have recovered.
Take unemployment. Contributing to Economic View in the New York Times, Christina Romer focused on the persistent high unemployment in the US. She aimed to debunk the many claims of structural changes in employment conditions that play into the claim that this time it’s different. She refutes, one by one: the impact of fewer jobs in finance and real estate – far to few to account for the current numbers; lower labor mobility through house lock – not so, per a forthcoming study; an unusual rise in vacancies, as observed by Narayana Kocherlakota – doesn’t account for the work of Peter Diamond on search markets, which anticipates an increase in vacancies. Her conclusion: “there is a more compelling explanation.”
Romer matches the current unemployment situation not to structural changes in the labor market but to low demand. Consumers are reluctant to spend. Corporations are therefore reluctant to hire. Both are hampered by tight credit conditions and lingering debt, so neither wants to spend or hire. Her piece weaves together a view not unlike the work on historical crises from Reinhart and Rogoff (book, papers, aftermath). In banking crises, asset markets decline, output and employment recede, and government debt increases. All of these have materialized, dramatically. But the crisis has not marked a structural change in the labor market. Instead, it choked off demand – demand that Romer argues could be replaced through thoughtful fiscal stimulus, such as infrastructure investment projects, which may also contribute externalities to future growth.
This time isn’t different. It’s rather like the last time, or the many other times we’ve been struck by a financial crisis. It’s cyclical. And if its cyclical, according to Romer, perhaps the best course of action is to speed up the cycle with a targeted fiscal stimulus program rather than fearing the bond vigilantes and the bogeymen of Schiff and Gross or prostrating oneself before pat expressions of apocalypse, like Haque’s.