Arnold Kling  

Another Recalculation Theorist

Bob Murphy on Krugman... Suits vs. Geeks...

Joseph Lawler writes,

The beauty of the structural change theory of jobless recoveries is that it is testable. If hiring is determined by shifts in what the economy produces, then the data will show that permanent layoffs outnumber temporary layoffs -- that is, workers aren't returning to their old companies. Also, there would be noticeable differences in hiring and firing patterns between different industries before and after the recession. The market would determine in which activities firms were overinvested, and which were ripe for further growth.

The data does seem to conform to the theory. In a 2003 study, Federal Reserve economists Erica L. Groshen and Simon Potter found that in past recessions, temporary layoffs spiked. They also found that the two recent jobless recoveries involved clear winning and losing industries, a conclusion they arrived at by looking at payrolls in different industries before and after the recession. The industry that best exemplifies this trend is the dot-com boom of the the late '90s. During the recession of 2001 it became clear that there was a bubble in web companies, and the industry began rapidly to shed trained workers. The extreme over-investment in the dot-com bubble is an identifiable reason why the job reports were so bleak so long after the end of the downturn. It simply took a long time for the economy to shake out where the former dot-com workers belonged. One industry, notably, that did take off in the wake of the '01 recession was...housing.

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CATEGORIES: Macroeconomics

COMMENTS (5 to date)
Arnie writes: employees are shed, move into financial services during the housing boom, but now where have they gone? They are reasonably well educated, so I they are probably resourceful as a group, but maybe they are at least a portion of the currently unemployed. If so, they should think carefully about Obama in 2012 since the recalculation is being slowed by Government meddling with most of the economy.

Greg Ransom writes:

I've been debating this with Scott Sumner at his blog.

Sumner insists the only "testable" causal evidence is Keynesian aggregate relations easily downloaded into any sophomores computer -- and "tested" with pre loaded software.

I've suggested that this is the equivalent of a drunk looking for his keys under a lamp post -- and that cycle explanation without strucutural micro causal mechanisms is like trying to explain the origin of species and adaptation with no differential causal micromrelations -- and using only Platonic macro enties, i.e. the kind of aggregate biological categories that Ernst Mayr tells us halted advance in biology for two centuries.

OK, but surely this is weak evidence indeed. Structural economic shifts are always taking place, and, as Krugman has emphasized, they don't usually produce recessions, much less panics. You need a far more precise definition of recalculation in order to make it into a testable hypothesis and an even tougher standard is necessary for it to be useful.

Russ Nelson writes:

Normal structural changes don't produce recessions because they don't happen all at the same time. When the government inflates the currency, that provides the coordination for everyone to march across the bridge in lockstep. Also, the structural change is accompanied by tighter credit because many loans went bad all at the same time, again because of government meddling.

You can always trust Krugman's economics ... to be wrong.

Russ Nelson's answer to capitalistimperialistpig sounds convincing to me.

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