If weak household balance sheets are responsible for a large share of job cuts, we expected losses in non-tradable industries to be much larger in U.S. counties with weak household balance sheets. That is exactly what we found. In counties in the top 10 percent of the 2006 household-debt distribution, employment in non-tradable industries declined 5.1 percent from 2007 to 2009. In the counties in the bottom 10 percent, the losses were only 0.3 percent.
Thanks to Phil Izzo of the WSJ blog for the pointer.
You can give this an AD interpretation: a loss in wealth lowers aggregate demand.
You can also give it a PSST interpretation. The patterns of trade in the high-debt regions were not sustainable, and as the saying goes, when the tide went out, we found out who was swimming naked.
If the Fed were to engage in expansionary policy, would these local pockets of adverse economic performance be cured? If you believe in AD, you are forced to answer in the affirmative. If you think in terms of PSST, you might answer in the negative.