Arnold Kling  

Joseph Stiglitz on Recalculation

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He writes,

First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services.

The problem is analogous to that which arose at the beginning of the twentieth century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers. With a decline in farm income in excess of 50% from 1929 to 1932, one might have anticipated massive migration. But workers were "trapped" in the rural sector: they didn't have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.

He is almost on the same page as I am. On the 1920s and 1930s, I agree that the productivity increase in agriculture was a big factor. Sharecroppers and farm hands were displaced by tractors.* However, I think you can just call this a structural adjustment problem without having to invoke the theory of aggregate demand.

(*I had not thought of these folks as "trapped." I was under the impression that, at least physically, they migrated a lot. But maybe I took The Grapes of Wrath and other stories of the era too seriously. It could be that the larger migration took place after the second World War (think of African-Americans moving to northern cities, for example). In fact, the war itself might have promoted a lot of migration.)

Another paragraph:

But the economy was very sick before the crisis; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand.

I wish he would elaborate on this. Is he saying that there has been a shortfall in aggregate demand for ten years? A lot of mainstream economic theory says that this cannot happen. Given enough time (and ten years is surely enough time, no?), the aggregate price level adjusts to equate aggregate supply and demand. Maybe he wants to say that there has been a sequence of adverse shocks to aggregate demand.

I guess I would say that the longer you extend the time frame of the economic distress, the more inclined I would be to describe it as a structural problem. That is where I come out.

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COMMENTS (5 to date)
JoeFromSidney writes:

Regarding migration from the South, I recall my high school superintendent remarking (late 1940s) that when a boy is born in Tennessee, the first thing the parents do is buy him a train ticket to Akron, so that 18 years later he can go work in a tire factory.

Becky Hargrove writes:

In many rural areas, one can go deep in the woods and hidden places, and locals will point out the remains of one room schoolhouses and little communities that existed until everyone moved away in WWII.

Fast forward to the last ten years: As to aggregate demand, perhaps it would not have been as weak as Stiglitz imagined, for many were also trying to launch small businesses and renting/buying commercial real estate at the same time. In fact, if the housing bubble had not been so substantial, many of those small businesses might have stood a better chance. So, in a sense there was a simultaneous bubble of small business speculation, but I like to think it was better grounded in reasoning.

Floccina writes:

Could he be saying that a technology can cause employees to be laid off across the economy faster than they can be hired in new industries?

Could he be saying that is what happened in 2000 - 2007 due to the internet computers and China and India(acting like a technology change) and that the fed caused a bubble trying to keep unemployment low or maybe by targeting inflation rather than total spending?

Chris T writes:

Could he be saying that a technology can cause employees to be laid off across the economy faster than they can be hired in new industries?

I've never really understood how this could even be seriously disputed. It is much easier to apply new technology to existing processes than it is to create entirely new processes.

Noah Yetter writes:

He's not thinking dynamically, which makes it hard to interpret his statement as anything other than nonsense.

It's at least plausible that without an opportunity for the housing bubble to get started, there would have been a demand shortfall at some point in time. But Stiglitz's statement makes it sound like that shortfall would have persisted unchanged from then until now. That's just ridiculous.

The housing bubble was the path-of-least-resistance way out of the aborted correction that followed the internet bubble. Structurally, that recession never ended, it was indeed just "papered over" as Stiglitz says. Where he's wrong is in thinking that absent the housing bubble we would not have gone anywhere. In truth, absent the housing bubble, and the disastrous "corrective" monetary policy response to the internet bubble bursting, we might have found a sustainable (in the PSST sense) way forward. Unfortunately our limited imaginations can scarcely guess what that might have looked like.

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