Is There Such a Thing as a Supply Shock Recession?

     Miles Kimball recently argued no and Sumner said he tends to agree. 

        "Actually, contrary to conventional wisdom, I am not persuaded that there are many events commonly called “recessions” that have supply-side causes, except when supply shocks led to inappropriate monetary policy responses. For example, bad (in the sense of worse-than-average) technology shocks cause outcomes much worse than recessions lasting for the same length of time, but in our AER paper "Are Technology Improvements Contractionary?" Susanto Basu, John Fernald and I find that these outcomes don’t look like typical recessions at all. Just look at the impulse responses we find from technology shocks and compare that to the typical notion of a recession. (The graphs are for positive technology shocks. Mentally flip the graphs upside down for negative technology shocks.) Terms like Tyler Cowen’s book title The Great Stagnation express well the effects of slowdowns in technological progress. The word “recession” just doesn’t capture the real-world effects of a slowdown in technological progress, either in ordinary English usage, or in NBER dating. "
     
      "Actually, contrary to conventional wisdom, I am not persuaded that there are many events commonly called “recessions” that have supply-side causes, except when supply shocks led to inappropriate monetary policy responses. For example, bad (in the sense of worse-than-average) technology shocks cause outcomes much worse than recessions lasting for the same length of time, but in our AER paper "Are Technology Improvements Contractionary?" Susanto Basu, John Fernald and I find that these outcomes don’t look like typical recessions at all. Just look at the impulse responses we find from technology shocks and compare that to the typical notion of a recession. (The graphs are for positive technology shocks. Mentally flip the graphs upside down for negative technology shocks.) Terms like Tyler Cowen’s book title The Great Stagnation express well the effects of slowdowns in technological progress. The word “recession” just doesn’t capture the real-world effects of a slowdown in technological progress, either in ordinary English usage, or in NBER dating. "

      http://blog.supplysideliberal.com/post/76196184332/reply-to-bill-woolsey-on-the-possibility-of-ending
     
      Interestingly, , I came across this post from back in 2009 over at Nick Rowe's-though not by him but his co-worker at the blog, Stephen Gordon- that argued that fiscal stimulus might not make sense because the cause of the Canadian recession was a supply shock:

     "David Andolfatto is somewhat concerned at the lack of thought that's been put into justifying a Canadian fiscal stimulus program. This is a theme that both Nick and I have touched on over the past few months, and the analysis is complicated by the fact that too many commentators make the assumption that Canada and the US are facing similar problems and should therefore adopt similar policy responses. But Canada is not the United States, and it's far from clear that a rush to put infrastructure projects in place is a priority. (See also this post.)

    "Firstly, we have to deal with the question of why Canada is in recession. The obvious place to start is the US recession, but that's at best a partial explanation. A US slowdown reduces Canadian aggregate demand, but not by enough to generate a severe recession."

    "What is enough to generate a severe recession appears to be a sudden drop in our terms of trade. To the extent that we'd try to shoehorn a terms of trade shock into a standard AS-AD model, it would probably do so as a technology shock. Trade can be conveniently thought of as a form of technology, so a negative terms of trade shock can be interpreted as a sudden reduction in our ability to transform commodities into consumer goods."

     "How should we react to a negative supply shock? If it were permanent, then there's not much for it except to get used to lower standards of living. Fortunately, there's very good reason to believe that this reduction is temporary; the long-run outlook for the prices of oil and other commodities is still consistent with a scenario in which Canada's the terms of trade return to their previous levels."

   http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/04/does-fiscal-stimulus-make-sense-in-a-supplyshock-recession.html

     With all the debates we've had about fiscal stimulus around here-on both all the econ blogs but certainly also here at Diary the last few days-this gives us another angle to look at the question from. Miles attitude is certainly close to Sumner's heart who really wants to sell the idea that the business cycle itself is a purely nominal phenomenon. 

      Yet Stephen Gordon seems to be making an anti stimulus argument by calling the recession a supply side recession. Not that it's so cut and dried-Gordon qualifies his comments:

     "This isn't an argument for trying to avoid a deficit, of course. If you're faced with an explicitly temporary reduction in income, the optimal response is to borrow/dissave in order to keep spending levels more or less constant. In other words, it does make sense for the various levels of government to run deficits in order to provide income support over the short term. And since Canada's governments have had the good sense to run surpluses for the past dozen years, they can do so without worrying too much about hitting our debt wall. But this reasoning leads us to think of spending money on such things as expanding EI eligibility and on reinforcing other elements of the social safety net, not on infrastructure programs."

    So he too hates infrastructure projects-it's amazing how much it's reviled by conservative economists. So we have the ultimate Monetarist position-Miles'-who thinks that recessions are purely nominal and then we have the argument that the recession in Canada was mostly about supply-kind of like a RBC recession-'technology shocks.'

    Do Keynesians believe in supply side recessions? It depends on who you consider a Keynesian. There are a number of Keynesians-Alan Binder comes to mind-who consider the 1975 recession-at the time a worldwide depression seemed a real possibility-a supply side recession-the oil price shock, helped along by the sudden drop of the wage-price controls. 

    There's been a good deal of debate about what constitutes authentic Keynesianism. It seems to me that while Keynesians and Monetarists acknowledge AD problems, Monetarists see this shortfall as being entirely nominal. Basically anything 'real'-like the balance sheet theory of the recession-Sumner and company see as unimportant to a recession. Sumner thinks the only reason we have a business cycle is sticky wages. 

    P.S. What I wonder about is whether people like Andolfatto who fretted that fiscal stimulus was wrong for Canada dues to it being a supply side recession also objected to it in the U.S. where it was about demand.