Tyler Cowen asks whether the downturn is "all about aggregate demand" as he cites restaurant and retail reports that don't look all that bad. Karl Smith makes a basic point that may end the discussion. He writes:
"Something I don’t have a macro-theoretical explanation for but have divined from experience is that people in general and managers in particular think of the market climate in terms of rates of change.
Business is doing well if business is doing better. Business is doing poorly if business is doing worse. This is irrespective of where they are compared to some baseline."
When the baseline is the bottom of a Great Recession, then yes - it does look like we've had growth. The question is, is that growth on track with long-term trends? The answer is not at all - it's still well below trend.
That may do it. But I'd be remiss if I didn't point out that restaurants and retail doesn't lead us out of a Keynesian recession like this one. Consumptionism is what they teach high schoolers when they learn about FDR and the 30s. We shouldn't fall into it here.
When firms make investments they are comparing an up front cost (or potentially a stream of costs) with a stream of uncertain benefits. One alternative opportunity to making that investment that they have is putting their money at interest - so the interest rate is an important opportunity cost for firms. When the intereset rate is too high because money demand is too high, or when expectations for future streams of income break discontinuously, you can get heavy volatility in investment - we call this "the business cycle". Often, monetary policy has sufficient flexibility to adjust the interest rate and recover full employment. Sometimes, it doesn't, either because there is a lower bound on monetary policy (ZIRP) or because money demand is so elastic monetary policy can't get traction (liquidity trap). It seems to me the latter is more serious but less likely than the former - but the discipline is still duking that out. Consumption plays much less of a role in all of this than a lot of people like to pretend it does. Keynes figured it was pretty stable and didn't talk about it too much. "Aggregate demand", for all intents and purposes, refers to (1.) investment demand, and (2.) change in consumption demand in response to the multiplier, or the movement of the Keynesian cross. Consumption doesn't lead recoveries (well - I suppose you could argue that reassessments of future consumption levels do - but that doesn't seem like it's being discussed here).
I talk more about Keynesianism vs. consumptionism here. They're related insofar as the cruder consumptionist theories did not presume full employment and so they predisposed people towards Keynesianism. You could say that consumptionists were in the right mindset to adopt Keynesianism. They were "wrong for the right reasons", and for that reason I actually do have a soft spot for underconsumptionists (and overproductionists, for that matter). But they didn't quite get it. This isn't to say that consumption increases are bad for the economy, of course. If they're exogenous that helps - if they're endogenous then it's a sign of at least some recovery. These changes simply don't get at the central point.
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