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From Ed Glaeser.


Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy.

That might be a one-sentence articulation of PSST. The challenge is to find the comparative advantage of potential workers so that they fit in to patterns of sustainable specialization and trade.

Glaeser points out that it is young firms that create these new patterns.


look at the period from 1996 to 2008. Every year, the new firms added more than 2.9 million jobs, on net; every year except 2000 and 2006, the other firms, considered as a whole, destroyed jobs, on net. Similarly, the boom of the 1980s was led by job creation from new firms. Even in 2009, at the bottom of the recession, new firms managed to add more than 2.3 million new jobs--though those job gains were overwhelmed by the 7 million jobs lost by older firms. The lesson here: older firms generally shrink, while new firms erupt, hire new workers, and make up for the older firms' job losses.

Does the AD/AS paradigm predict this pattern?


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CATEGORIES: Macroeconomics



COMMENTS (5 to date)
Andreas Moser writes:

I'll be out of work in a month and I look forward to it. Finally I'll have more time for my studies and my other projects.

Scott Gustafson writes:

Isn't this really just the employment result of businesses going through the BCG Matrix. Start as a question mark that needs investment. If successful, it turns into a shooting star that grows rapidly. This is followed by cash cow status where the company milks it for all it's worth while reducing investment and employment. Eventually it turns into a dog with downsizing and sale.

And no, there is nothing in the AS/AD model that acknowledges this process.

Costard writes:

Less important than whether AD/AS predicts the pattern is whether it prescribes the right "cure". Interventionist policies that result from AD/AS almost unavoidably favor existing industry, and this is necessarily at the expense of new firms. Bailouts for large players tilt the playing field and drive out venture capital. Similarly it is the big firms that get first crack at government money/fed liquidity. If new businesses have more generative/regenerative ability than old, then the math is pretty simple.

Regulation has the similar effect of driving capital into frontier industries like tech, or fields where the regulators are asleep. I wonder, to what extent are liquidity-driven bubbles facilitated, or channeled, by the regulatory environment of the moment?

Lord writes:

And every year other than 2001-2003 we were not in recession.

Julien Couvreur writes:

I still fail to understand the difference between PSST and the regular ABCT, but it seems the problem goes deeper than a lack of imagination. It is possible to make imagination a lot harder by introducing a sudden change in direction (bubble mistakes are discovered, imagination therefore has to play catch up, one time solutions have to be found to re-purpose wasted capital goods), and mixing up signals (imagination is constrained by prices).

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