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Ryan Avent Is Overly Harsh... - Grasping Reality with Both Hands

10/21/10 7:49 PM

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The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch September 23, 2010

Ryan Avent Is Overly Harsh... He writes: Free exchange: MY CRUSADE for a more sophisticated discussion about the American labour market seems to be falling short of its goals. Lawrence Mishel released a note yesterday entitled, "Debunking the theory of structural unemployment", which concluded: Widespread claims that our unemployment crisis is structural are not only inaccurate, but they imply that macroeconomic tools such as fiscal policy (spending or tax cuts) or monetary policy can not address our unemployment crisis. Surprisingly, perhaps amazingly, there’s no systematic empirical evidence for such assertions. Policy makers should understand that the problem faced by the unemployed is a simple scarcity of jobs... Sigh. First of all structural unemployment isn't a "theory" to be "debunked"... He misreads Larry: the "theory" to be debunked is the theory that our current unemployment is structural, and thus that standard expansionary macroeconomic policy tools would not be effective. And, indeed, that is what those who are saying that our current unemployment is structural are claiming: that standard expansionary macroeconomic policy tools would not be effective. So when Ryan writes: contrary to most of the people poo-pooing the structural side of things, structural unemployment does not imply that government should do nothing... He should be writing: contrary to most of the people pushing the importance of the structural side of things, structural unemployment does not imply that the government should do nothing... http://delong.typepad.com/sdj/2010/09/ryan-avent-is-overly-harsh.html

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Ryan Avent Is Overly Harsh... - Grasping Reality with Both Hands

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The overwhelmingly likely possibility is that at the moment little of our unemployment is "structural," but that if demand is not boosted to reduce cyclical unemployment that it will turn into structural unemployment and then be with us for a decade or more. The fact that cyclical unemployment turns into structural unemployment is a possibility that adds immense urgency and power to the case for more demand stimulus right now. Yet that is not what Ryan Avent concludes. Instead he reaches for the "plague on both your houses" journalistic trope: Policymakers have become less interested in knowing what problems need solving and more interested in knowing how best to sell the policies they'd like to enact. Republicans don't want to enact stimulus, but wouldn't mind cutting taxes, cutting the minimum wage, and rolling back other labour rules. Democrats may want to enact more stimulus, but they also remain interested in other programmes that are likely to boost spending (in practice, it's hard to know what "Democrats" want —the caucus is hardly speaking in unison right now). And so the polarised policy discussion sources itself in a polarised analysis of current conditions. And if you care to influence this policy debate, you have to speak in polarised terms. Policy is explicitly zero-sum. If you acknowledge structural unemployment, you strengthen the Republican policy argument and weaken the Democratic policy argument.... [S]ome prominent economic writers appear to have so internalised the polarised method of argumentation that they no longer recognise they're doing it. It comes naturally, even when discussing issues that haven't necessarily been wedged into the polar, partisan dynamic. It's unfortunate, and frustrating, and disappointing. But I don't know that anything can be done about it. What Ryan could do is say that the fact that some of our unemployment may be structural and a lot more is likely to become structural makes the Republican policy stance not just stupid and destructive but insane and catastrophic. That would advance the debate... Brad DeLong on September 23, 2010 at 08:36 AM in Economics, Economics: Labor, Economics: Macro, Obama Administration | Permalink Favorite

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Ryan Avent Is Overly Harsh... - Grasping Reality with Both Hands

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I've always believed Avent to be overrated. Reply September 23, 2010 at 09:07 AM JimW said... I had understood structural unemployment to mean a state of affairs where job vacancies exist that don't match up with the characteristics of unemployed people. It's pretty clear that the data don't support the argument that this is now a significant share of unemployment. However, it does appear that a significant share of today's unemployment arises from a downward shift in the demand for labor at any given level of output. Businesses are working the existing workforce harder and appear less willing to hoard labor in anticipation of an upturn in demand. It's unclear whether this is a permanent improvement in productivity--that the missing labor demand represents shedding of deadwood--or whether it's temporary and will be reversed as soon as demand is stronger and employees have enough bargaining power to resist demands for uncompensated extra effort. We'll see. The polarizing debate appears to be about why we've seen this shift in the labor demand/output relationship. The President's opponents attribute it to his policies--perceived anti-business attitude causing business to be unwilling to make human capital investments, costs of health care, fear of tax increases, and so forth. I think that this group mistakenly refers to this source of unemployment as "structural," by which it means unemployment that is not attributable to a shortfall in demand, as opposed to unemployment that is matched by job vacancies. Personally, I attribute it to employers' (realistically) forecasting a prolonged shortfall in demand and preparing for that contingency. But I don't know, and it's an interesting question. Reply September 23, 2010 at 10:09 AM Robert Waldmann said... Avent's whole argument is based on the idea that if one objects to saying the problem is structrural then one must argue that it isn't in part structural. It depends on what the definition of "is" is. In English when one says "A is B" one means "all of A is B". In Aventish one means "part of A is B" so when I say "this computer is gold" I am right, and he shouldn't complain if he pays me $1000 an ounce and finds just a little gold. Now I don't think the English language is perfect. For example, there is the verb "to polarize" which has clear negative connotations. There isn't a simple verb for cursing both houses and rigidly assuming (or lazily asserting) that the truth is somewhere in between. I have attempted to invent "to Ballance" ex congressman Jack Ballance (D-I forget) who was included in a Washington Post list of office holding crooked politicians to add balance http://tinyurl.com/ykh8n8b . Reply September 23, 2010 at 11:01 AM DrDick said... If he means by structural unemployment that all of the highly paid skilled labor positions have been shipped overseas and that the laid off workers are overqualified to work at McDonalds, he may have a point. Otherwise, what we are clearly looking at is a lack of demand, not a lack of labor supply. Of course the response of the conventional wisdom will be that this demands that we cut taxes for the very rich and ignore the actual productive workers. Reply September 23, 2010 at 11:14 AM River said... I am not a economist, but when you say that aggregate demand needs to be stimulated to get us out of this mess sounds an awful lot like GWBush's advice after 9/11 for the http://delong.typepad.com/sdj/2010/09/ryan-avent-is-overly-harsh.html

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Ryan Avent Is Overly Harsh... - Grasping Reality with Both Hands

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populace to go shopping to get the economy moving. Didn't we just get out of a huge bubble, where the level of demand was artificially inflated by fraud and overleveraged borrowing, and this ponzi scheme basically collapsed? Doesn't the prescription for stimulating aggregate demand totally discount this fact? When people say that the economy suffers from "structural issues," I read between the lines to think that the structural issues they are talking about are that our jobs have been shipped overseas incrementally over the last 10 to 15 years, and that the rest of us with jobs are too indebted to increase our spending. I am not arguing that the government should do nothing, but until I start to hear economists talking about stuff that looks like the real world from my perspective, I kind of lose faith in their ability to fix this problem (I kind of doubt this problem never gets fixed). Reply September 23, 2010 at 01:02 PM Scamp Dog said in reply to River... If I recall correctly, the GWB advice to go out shopping was about restoring confidence that everything would work out, we didn't need to shut down our economy to pay for the war effort, etc, etc. I agree with you that a good chunk of the housing bubble was generated by fraud and over-leveraged borrowing, but I think that may have been more of a supply issue: the financial markets were awash in money and there weren't many good investments out there, so hey, let's lend people money to buy new houses or refinance their old ones. The demand problem now is that people out of work, and people afraid of losing their jobs reduce spending as much as they can. If it's just you losing your job, it sucks to be you. If you lost your job because the plant laid off 500 people, it also sucks to be the local car dealer, a restaurant owner, the dry cleaner, whoever. Now they start getting rid of employees, too, who reduce their spending... Lather, rinse, repeat. Spending doesn't drop to zero of course, because people have to eat, they'll try to make the mortgage as long as possible, the kids need new clothes, they'll drive to job fairs, interviews and such. Now imagine you want to start a new business. Well, who's going to buy your product/service? All those out-of-work people sure won't be buying, the worriedabout-their-jobs probably won't, and anyway the bank won't loan you money because they think you won't be able to pay them back (no customers, remember?), and the economy can get stuck for some time. Brad, our host here, is publishing the notes from his Econ 1 course, and I highly recommend them for getting you up to speed on economics. Reply September 23, 2010 at 06:05 PM Comment below or sign in with TypePad

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Ryan Avent Is Overly Harsh... - Grasping Reality with Both Hands