"Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at full speed, the government should borrow and spend more. The federal government is now running deficits of about $1 trillion a year. Some of these cyclicalists believe the deficit should be about $1.4 trillion."
http://www.nytimes.com/2012/05/08/opinion/brooks-the-structural-revolution.html?_r=2&hp
Ah, a one-sided debate. As opposed to who? Some Very Serious People (VSP) having a "mature" many sided debate? Remember when no one in the media could speak of Paul Ryan without the adjectives "courageous" and "serious?" Of course David Brooks is not a partisan Republican, he's a wise sensible centrist who is wholly innocent of the sin of partisanship. So these one-sided people on the Left who want to see an increase in demand are to contrasted with the VSP:
"Other people — some on the left but mostly in the center and on the right — look at the cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address the core issues." "
"The diverse people in this camp — and I’m one of them — believe the core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt."
"There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows."
"Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers."
"Then there is political sclerosis. Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, making the economy less dynamic."
"These and other structural problems have retarded growth and wages for decades. Consumers tried to compensate by borrowing more. Politicians tried to compensate by reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into the less productive and more sheltered parts of the economy — mostly into health care, government and education."
"But you can only mask structural problems for so long. The whole thing has gone kablooey. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last. The old model is broken. The jig is up."
Ah, the "jig is up." Notice how self righteous the austerity lovers always are? We keep hearing regarding the recent elections in Europe that "the hard choices must be made sooner or later." This presumption that they're right and they're going to win.
Is there anything in this structural explanation? Well there's certainly a lot not to like because it's just plain wrong. Like much of this:
"Running up huge deficits without fixing the underlying structure will not restore growth. As Raghuram Rajan of the University of Chicago writes in the current issue of Foreign Affairs, “Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly — or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction and government sectors need to shrink, and workers need to move to more productive work.”
"Structuralists face a tension: How much should you reduce the pain the unemployed are feeling now, and how much should you devote your resources to long-term reform? There has to be balance. For my taste, the Germans are a bit too willing to impose short-term pain on the diverse national economies in Europe. But they are absolutely right to insist on the sort of structural reforms they themselves passed in the 1990s."
"In the United States, there are almost no politicians willing to embrace the cyclicalist agenda, which would mean much larger deficits. Structuralists don’t have a perfect champion either. President Obama is too minimalist. He doesn’t seem to believe America’s structural problems are that big, making his reform ideas small. Mitt Romney and Representative Paul Ryan understand the size of the structural problems, but their reform plans are constrained by the Republican Party’s single-minded devotion to tax cuts."
"Make no mistake, the old economic and welfare state model is unsustainable. The cyclicalists want to preserve the status quo, but structural change is coming."
First of all this hysteria about deficits is a baseless canard. Has Brooks failed to notice that there have been no attack of the bond vigilantes and our borrowing costs have not risen but are actually at an all time low? There are certainly ways to restore growth but we haven't done enough of it.
TANF.
The idea that demand doesn't matter just shows Brook's economic illiteracy. And much of his plea for structural reforms is just the usual attempt to gut Medicare and Social Security. There's no basis for privatizing or cutting back Medicare or Social Security. Neither need go bankrupt as the scare tactics try to convince you and again the deficit hurting our competition is nonsense.
Now there are some that argue in the longer term the deficit will be a problem. The trouble with this is that it ignores how much of the deficit is due to the recession. A full recovery will deal with much of it. So there's no way you could plan a deficit plan now as you don't know what it will be once the economy fully recovers.
Again, enough with the deficit talk! I almost want to do a Dick Cheney who said: "Reagan proved deficits don't matter."
They certainly don't matter right now. Far be it from our borrowing costs going up are debt is so in demand now-the euro worries may push demand even higher-that this is the perfect time to do what Brooks claims is unthinkable-more borrowing and spending. When if not now when investors want to pay us to lend us money?
I will say that Brooks at least does make a few valid points-the economy prior to 2008 was far from healthy. However he's wrong to suggest it has anything to do with a "welfare state model." Take that away though and it is true that things were not rosy before the 2008 crisis. It's interesting to compare Brooks here with someone like Sumner.
Liberals and Keynesians find Sumner in many ways much more attractive as he does admit that this is demand driven primarily. However, he does make it clear that he supports the same structural reforms that Brooks does. The main difference is that Sumner says that the supply side reforms he'd like to see aren't necessary now and he doesn't claim as Brooks and most Republicans do that the structural problems is the chief cause.
However Brooks is closer to the truth than Sumner in the sense that we had many problems before 2008 and much of his description actually is apt:
"There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows."
In this part of his narrative I think he's actually far superior to Sumner who wants us to believe that all was well until the Fed didn't ease enough in late 2008. Again, I think Brooks does actually accurately describe the pre 2008 problems, while much of Sumner's criticism of the Fed is compelling but his attempt to deny any real economic factors in leading to the downturn.
Indeed, recall that Joe Stiglitz was murdered by the Right wing economists for his Rolling Stones article where he argued about structural problems in causing the Depression. There is no question that the US economy had not been alright for a long time prior to 2008. This was totally ignored by mainstream macroeconomists patting themselves on the back for The Great Moderation.
The Bush recession of 2001 is wrongly remembered as being shallow and short. It wasn't. Talk about the "Bush Boom" suffers from real amnesia. Bush had the weakest job growth since the end of WWII. Yet it's worse than this. The common reaction to the Macro guys to Stiglitz's article was to argue that unemployment can't be raised by things like globalization and the large technological change as the displaced workers simply should go to new industries.
While the Bush recovery was very weak-compared to where Obama is now the private sector gains were actually weaker than what we've had under Obama-we finally caught up in 2004. But while the displaced workers did mostly finally find jobs there were mostly service sector jobs that were badly paying. It's not appreciated how many white collar workers were displaced during the 2001 Recession.
So while workers did migrate to new industries these were low paying service jobs, where many people with degrees became burger flippers. However, this doesn't mean that we don't have a demand short fall and don't need fiscal stimulus.
There is-as I understand it-an opening of more higher paying jobs in manufacturing. During the current recovery US manufacturing has started to show signs of life for the first time in years. There are job openings that require a science or engineering background. There is then I think a need to better educate our students-the recent international tests certainly prove that out-and also directing them to the right types of education. This can be started in high schools and colleges.
Of course to better educate Americans this requires more not less spending. We need to invest more in education particularly in the urban ghettos and poor, rural areas, etc.
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