Why Is Anybody Surprised That the Job Shortage Continues for so Long? In Which I Troll Noah Smith for a Lazy Monday Morning…: Featured for September 8, 2014

Noah Smith: Job Shortage or Stagnation Vacation?: “Are Americans working less because the government is paying them not to work?…

…A large number of people seem to think this…. Mitt Romney’s infamous ’47 percent’ speech…. Casey Mulligan…. Kurt Mitman…. Jordan Weissmann…. But… if government programs are paying people not to work, then that should put upward pressure on real wages…. But… that’s not what we see happening…. Economics 101 says that when the price of something and the quantity produced both fall, demand, not supply, has fallen. In America, the price of labor and the quantity of labor have both fallen and stayed low since 2009. That is a hint that the government’s welfare programs are having only a minimal impact…. So what is it? Well, I don’t think anyone really knows why these long stagnations happen. I suspect that it has something to do with the aftermath of financial crises, but the link is not yet well understood.

I, by contrast, think that we do understand very well why it is that stagnations continue once the economy has gotten wedged.

Right now people in the aggregate are happy spending more or less their incomes, and individual managers think that if they hired more people and produced more stuff they would be unable to sell it at a good enough price to increase their profits. You might think that since there are a lot of unemployed workers they would offer to take the place of employee workers at lower wages, and after that replacement took place the profit-and-loss calculus would be different and so firms would hire more people and produce more stuff, but the labor market does not work that way. You might think that, since there are a lot of unemployed workers and no threat of inflation, central banks would lower interest rates and that would give an incentive for businesses to start spending more than their incomes by boosting investment in new capital and that would start a virtuous cycle going.

Indeed, that is the way a stagnation usually gets fixed.

But right now central banks have lowered short-term interest rates as far as they can go: they cannot lower them any further to boost spending. And so far central banks have proved unable or unwilling to promise to keep interest rates low enough for long enough to materially alter the investment spending calculus. Governments have proven unwilling to take up the slack with their own spending. And raising financing for residential construction or small and medium enterprise expansion remains very difficult because of the clogged credit channel.

So where is the mystery? What don’t you understand?

The mystery is, rather, that there are people who expect a stagnation at the zero interest rate lower bound with fiscal policy dominated by austerity and 8 clogged credit channel to be short…