Evan Soltas points out what seems to me to be a fact that's been blatantly obvious for years now: that we are faced with an aggregate demand shortfall. He invests a lot in this:
"This question [what caused the recession of 2008] means a lot to me, and (I think) in a unique sort of way.
I became interested in economics during, even because of, the 2008
recession. It has shaped how I think about economics, as I imagine it
has for much of my generation, in a way for which the only historical
precedent seems to be the wave of Keynesian economists forged by the
Great Depression who swept academic and policy circles in the 1940s,
50s, and 60s.
So what caused the recession of 2008? A drop in aggregate demand which
was caused by, or not counteracted by, monetary policy. Full stop."
I find this very interesting, because I don't think there's anything unique or defining of our generation about this answer. I think this is the obvious answer since the 1930s (one might say that it took Milton Friedman to bolster the second clause a little, but even Keynes was pushing devaluation and monetary policy as the first line of defense very early on). My view is that giving this answer is enough to buy you a seat at the table of serious economic discussion, and not much more.
And there's quite a bit of discussion left after we establish this point.
Monday, June 18, 2012
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It must be my incurable stupidity in that I do not see how this is an adequate answer. Suggesting that a fall in aggregate demand is responsible for the recession is incomplete.
ReplyDeleteWhen I hear that aggregate demand has fallen, it means to me that people are demanding fewer goods and services altogether. A change from one service to another would not represent a change in total demand, but sectoral demand. In order for aggregate demand to fall, it seems to me that total incomes have fallen. But how can this be? People haven't stopped desiring things; so they must have less money for which to buy things.
If this is right as it is, it only pushes the question back. If a fall in aggregate demand means a fall in aggregate income, what caused the fall in aggregate income? It's not enough to say "people stopped buying as many things as they did before X happened," the relevant question is why? And this is why ABCT, PSST, or some explanation including an analysis of the fundamentals of the economy are required. We need to look at the capital structure, the relationships between interest, liquidity, and capital intensiveness, and etc.
It's simply intellectual laziness to stop at "people need to spend more."
Right - that's largely my point when I say that this answer just buys you a seat at the table. There are a lot of other things to discuss once you establish something is going on with demand. Once we're done laughing off Casey Mulligan and RBC types, there's a lot more left to discuss.
DeleteJonathan had a good post the other day about ABCT as a demand-side theory.
Dan in fairness Soltas has a lot more to say than just that it's a demand problem-not that I'm neceesarily all in on Market Monetarism.
ReplyDeleteIn reality though there is still a lot of flat earthers out there who don't agree and think all that matters is supply. If only it were so that we can just laugh off RBC. The GOP for starters believes in the supply side story and ABCT still has wide currency.
If you listen to Fischer or Bulliard you see even some Fed people themselves seem partial to supply and "structural" problems.