Brad DeLong: Worthy reads on equitable growth, December 14–20, 2019

Worthy reads from Equitable Growth:

1. Come to our reception at the ASSA Annual Meeting in San Diego on January 3!
2. Read my “Was the Great Recession More Damaging Than the Great Depression?,” in which I write: “Your parents’—more likely your grandparents’—Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of subnormal production and employment. Yet 11 years after the 1929 crash, national income per worker was 10 percent above its 1929 level. The next year, 12 years after, it was 28 percent above its 1929 level. The economy had fully recovered. And then came the boom of World War II, followed by the “thirty glorious years” of post-World War II prosperity. The Great Depression was a nightmare. But the economy then woke up—and it was not haunted thereafter. Our “Great Recession” opened in 2007 with what appeared to be a containable financial crisis. The economy subsequently danced on a knife-edge of instability for a year. Then came the crash — in stock market values, employment and GDP. The experience of the Great Depression, however, gave policymakers the knowledge and running room to keep our depression-in-the-making an order of magnitude less severe than the Great Depression. That’s all true. But it’s not the whole story. The Great Recession has cast a very large shadow on America’s future prosperity. We are still haunted by it.”

Worthy reads not from Equitable Growth:

1. Michael Boskin wrote this two years ago. To my knowledge, not once in the past two years has he acknowledged that his “professional judgment” about the effects of the Trump-McConnell-Ryan tax bill were wrong. There has been no jump in the equipment investment share of national income. And those of us whose judgment is better than Michael Boskin’s were damned certain back in late 20127 that there would not be. Read Michael Boskin, “Another Look at Tax Reform and Economic Growth,” I which he wrote: “With the Republican tax package now finalized and coming to a vote in both houses of Congress, a debate has been raging over the bill’s possible growth effects. In that debate, those who oppose the package seem to be underestimating the outsize impact of equipment investments … I agree that the current tax bill could, in principle, have been better … Barro and I have clearly come to a different conclusion than Summers and Furman have about the bill, based on our own judgments about the links between corporate-tax reform and economic growth. While I certainly respect Summers and Furman’s right to their views, I am not about to cede my professional judgment to others, in or out of government.”
2. This is a very, very nice example of the genre of microfoundations tuned to give a desired macroeconomic result. Lots of people find this kind of thing very useful, or at least comforting. So I am probably wrong in my lack of enthusiasm here. Read Daniel Murphy, “Excess Capacity in a Fixed Cost Economy,” in which he writes: “[When] firms … face only fixed costs over a range of output … equilibrium output and income depend on consumer demand rather than available supply, even when prices are flexible and there are no other frictions. The theory matches the procyclicality of capacity utilization, firm entry, and markups. A heterogeneous household version of the model demonstrates how an economy can enter a capacity trap in response to a temporary negative demand shock: When demand by some consumers falls temporarily, other consumers’ permanent income (and hence their desired consumption) falls. Since output is demand-determined, the permanent fall in desired consumption causes a permanent state of excess capacity.”