Tag: aggregate demand

Must-Read: Nick Bunker: How the U.S. Housing Boom Hid Weaknesses in the Labor Market

Posted on by Brad DeLong

Must-Read: But I cannot help but think that the argument of this paper is fundamentally wrong:

Nick Bunker: How the U.S. Housing Boom Hid Weaknesses in the Labor Market: “The share of workers ages 25 to 54 with a job has been on an overall decline since 2000…

…This decline hit prime-age workers without a college degree particularly hard…. Kerwin Kofi Charles and Erik Hurst of the University of Chicago and Matthew Notowidigdo of Northwestern… detail the relationship between share of prime-age, non-college-educated men working in manufacturing, working in construction, and those not employed. The combined share of these three series seems to stay relatively constant at about 50 percent, with increases in construction employment offset by declines in manufacturing employment or declines in non-employment. So perhaps increased demand for construction workers during the housing bubble offset the declines in manufacturing employment. Looking at trends in employment across metropolitan areas in the United States, the three authors find evidence that the construction industry did end up hiring workers who left the manufacturing sector…. The results of this paper support the larger idea that declining employment and labor force participation among prime-age men is primarily a result of declining demand for the types of labor that many of them traditionally provided…

The first two figures in the paper show the share of non-college men with jobs holding roughly steady until 2000, and then declining:

Pubs aeaweb org doi pdfplus 10 1257 jep 30 2 179

And the number of manufacturing plus construction jobs staying roughly constant until 2000, and then declining:

Pubs aeaweb org doi pdfplus 10 1257 jep 30 2 179

Share. Number. Share. Number. The non-college male employment share held up perfectly well through 2000 in spite of the fact that the average non-college male had a smaller and smaller chance of landing a job in manufacturing-and-construction. “Declining demand of the types of labor… traditionally provided” has no effect on employment shares–until after 2000. I believe that declining demand had a big effect on the price of labor–on real wages. But I see no sign it had any effect on the chance of a non-college male getting a job.

And look at non-college women:

Pubs aeaweb org doi pdfplus 10 1257 jep 30 2 179

Lagging men by 12%-points in employment in 2000, but by 15%-points today.

I see no reason to think that there is a cross-gender cross-era thing in employment shares for shifts in economic structure that lead to a declining demand for labor in traditionally “male” sectors to explain. Slack demand and thus a broken labor market is a much better hypothesis to start with.

Must-read: Ken Rogoff: “The Fear Factor in Global Markets”

Posted on by Brad DeLong

Must-Read: This, by the very-sharp Ken Rogoff, seems to me to be simply wrong. If “the supply side, not lack of demand, is the real constraint in advanced economies” then we would live in a world in which inflation would be on a relatively-rapid upswing right now. Instead, we live in a world in which Global North central banks are persistently and continually failing to meet their rather-modest targets for inflation. If a fear of supply disruptions or supply lack were ruling markets, then people in markets would be heavily betting on an upsurge of inflation and we would see that. But we don’t. What am I missing here?

Ken Rogoff: The Fear Factor in Global Markets: “There are some parallels between today’s unease and market sentiment in the decade after World War II…

…In both cases, there was outsize demand for safe assets. (Of course, financial repression also played a big role after the war, with governments stuffing debt down private investors’ throats at below-market interest rates.)… People today need no reminding about how far and how fast equity markets can fall…. The idea is that investors become so worried about a recession, and that stocks drop so far, that bearish sentiment feeds back into the real economy through much lower spending, bringing on the feared downturn. They might be right, even if the markets overrate their own influence on the real economy. On the other hand, the fact that the US has managed to move forward despite global headwinds suggests that domestic demand is robust. But this doesn’t seem to impress markets….

The most convincing explanation… is… that markets are afraid that when external risks do emerge, politicians and policymakers will be ineffective in confronting them. Of all the weaknesses revealed by the financial crisis, policy paralysis has been the most profound. Some say that governments did not do enough to stoke demand. Although that is true, it is not the whole story. The biggest problem burdening the world today is most countries’ abject failure to implement structural reforms. With productivity growth at least temporarily stuck in low gear, and global population in long-term decline, the supply side, not lack of demand, is the real constraint in advanced economies…

No: We can’t wave a magic demand wand now and get the recovery we threw away in 2009

Posted on by Brad DeLong

The estimable Mike Konczal writes:

Mike Konczal: Dissecting the CEA Letter and Sanders’s Other Proposals: “I would have done Gerald Friedman’s paper backwards…

…He gives a giant headline number and then you have to work into the text and the footnotes to gather all the details. But a core assumption within the paper is that we are capable of getting back to the 2007 trend GDP through demand. We can get the recovery we should have gotten in 2009…

He is wrong.

We cannot get back to the 2007 trend GDP through demand alone.

For one thing, demand for investment spending has now been low for almost a decade. Since 2007, we have foregone relative to the then-trend:

  1. 16%-point-years of GDP of housing investment.
  2. 6%-point-years of GDP of equipment investment
  3. 5%-point-years of government purchases–of which roughly half have been investments.
  4. 4% of our labor force from their attachments to the labor market.
  5. A hard-to-quantify amount of development of business models and practices.
FRED Graph FRED St Louis Fed

These are principal causes of “hysteresis”. I do not believe that the output gap is the zero that the Federal Reserve currently thinks it is. But it is very unlikely to be anywhere near the 12% of GDP needed to support 4%/year real growth through demand along over the next two presidential terms.

We could bend the potential growth curve upward slowly and gradually through policies that boosted investment and boosted the rate of innovation. But it would be very difficult indeed to make up all the potential output-growth ground that we have failed to gain during the past decade of the years that the locust hath eaten