Yet for all the problems with the Stiglitz theory of the Great Depression and the Long Recession, there is some useful wisdom as well.
Stiglitz is framing a critique–not only of the Friedman/Schwartz theory of the Depression–but also of the neo-Keynesian theory of today’s economic problems.
The neo-Keynesian view of the current situation (expressed most pungently by Paul Krugman) goes something like this:
The US economy has been hit by a financial crisis, not an economic crisis. The crisis has deprived consumers of the cash and credit to buy goods and services. Aggregate demand has slumped, and so therefore has employment. If government stepped in as a substitute buyer of goods and services, demand would revive – perhaps as rapidly as a mere “matter of months,” as Paul Krugman boldly stated in a recent blogpost.
More conservative commentators, who dislike the neo-Keynesian call for lotsa-lotsa government spending, argue that today’s unemployment is “structural”–the product of a mismatch between the skills possessed by today’s workers and the demands of today’s consumers. Some (but not all) proponents of the structural unemployment theory espouse the full-blown Austrian economics theory of the business cycle, the malinvestment theory, whereby any attempt to mitigate unemployment must perversely aggravate unemployment.
(There’s a funny anecdote about the Austrian theory of the Great Depression, told by Joan Robinson in 1971.)
I very well remember Hayek’s visit to Cambridge [in 1931] on his way to the London School [of Economics]. He expounded his theory and covered the blackboard with his triangles. … The general tendency was to show that the slump was caused by inflation. R.F. Kahn … asked in a puzzled tone, ‘Is it your view that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’ ‘Yes,’ said Hayek. ‘But,’ pointing to his triangles on the board, ‘it would take a very long mathematical argument to explain why.’
The structural unemployment argument has many problems of its own. For one thing, it quickly becomes tautological – the very fact of prolonged unemployment is seized on as proof of a skills-demand mismatch.
Yet surely there is something to this point in our current context. The best section of Stiglitz’s article is his exposition of the pressure on less-skilled labor in the years before the 2008 financial crisis.
That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble ….
Surely this is right? Before the crisis, very large numbers of Americans lived in a world that seemed to have less and less demand for what they could do. American skill levels – even basic literacy – seem to increasingly inadequate to generate rising incomes. Thanks in large part to misguided immigration policies, skills in America seem to be in multi-generational outright decline.
Higher aggregate demand may find some kind of work for such Americans to do. The longer-term outlook is not so good however when we disaggregate, as those strange bedfellows Stiglitz and Hayek urge us to do. Stiglitz is no conservative, of course, and he’s not bashful about government spending. But he does share one of Hayek’s most valuable insight: the insight that “aggregate demand” is an aggregation of demands for particular things.
[J]ust as there cannot be a uniform price for all kinds of labour, an equality of demand and supply for labour in general cannot be secured by managing aggregate demand. The volume of employment depends on the correspondence of demand and supply in each sector of the economy, and therefore on the wage structure and the distribution of demand between the sectors.
The particular labor of most Americans was decreasingly well-paid in the last economic expansion. When recovery comes, what will it look like for the large majority of American wage-earners? A future that offers most Americans higher employment but only at declining wages represents something more than an economic problem.
- MORE TO COME -