Following up on some of the issues raised in the post above this one, here's a quote from today's NY Times that summarizes my view on whether we should intervene with policy:
The second part of the quote doesn't express what I was trying to say very well. Brad DeLong expresses it a bit better:
Mark A. Thoma, an economist at the University of Oregon, says the financial crisis would have been worse if the government hadn’t rapidly intervened.
“I completely disagree with the idea that letting the markets heal themselves is the best idea,” he says. “We tried that in the ’30s, and it didn’t work out so well."
[W]henever governments largely ... let financial markets work their way out of a panic out by themselves – 1873 and 1929 in the United States come to mind – things turned out badly. But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly.And, since I'm quoting myself, here's one more from yesterday at CNN Money on whether the fiscal stimulus in place already has worked:
The true test of the stimulus package will come in the fall, when the government reports economic activity for the third quarter. The administration is working to get the money out the door quicker, as complaints mount that stimulus is not having its promised effect.
"The third quarter will be a critical time period for assessing the stimulus package," said Mark Thoma, an economics professor at the University of Oregon.
As to whether we need more fiscal stimulus, if we wait until we know for sure it will be too late. I've been worried that employment would lag behind output once the economy recovered, and that the fiscal stimulus package we put in place was not sufficiently devoted to the employment recovery problem for quite awhile now, and I haven't changed my mind. From last June at MarketPlace:
Fiscal policymakers should have recognized that employment has tended to recover sluggishly in recent recessions and implemented policies that are known to create jobs. But they didn’t...
We need policies that put people back to work immediately. Unfortunately, when the first fiscal stimulus package was being formulated, stimulus programs that hire people to do things that don't enhance long-run growth was a difficult sale politically, so we were left trying to stimulate employment largely with infrastructure projects that were difficult to bring online quickly (which will be even more true if there is another round). I would have preferred that more of the original stimulus package be devoted to projects that created immediate employment, and if we do another stimulus package, as we should given the shape that labor markets are in, I hope we pay more attention to the employment problem.
Update: Along these lines, recently, Brad DeLong wrote:
The Changing Nature of the American Business Cycle, by Brad DeLong: ...It used to be the case that businesses hoarded labor in recessions because they did not want their skilled workers to wander off and to have to train new ones....
Now it is really beginning to look as though businesses take recessions as opportunities to greatly slim down their workforces without making the workers they retain too angry and depressed. We saw this in 2002-2003. We saw it before in 1992-1993. The fact that productivity is no longer strongly procyclical in recessions is good news in the long run--it means that our average long-run rate of productivity growth is higher than we used to think. But it also means that there is more headroom for expansionary policy, and more need.
Thus statements like this one from the very sharp Allan Sinai:
Phil Izzo reports:: "The mother of all jobless recoveries is coming down the pike," said Allen Sinai of Decision Economics. But he doesn't favor more stimulus now, saying "lags in monetary and fiscal policy actions" should be allowed to "work through the system..."
make me pound my head against the wall. If as the policies we have now in train to support the economy work their way through the system we find that we still have "the mother of all jobless recoveries," then we should be acting now to provide additional government support. A jobless recovery is not a good thing. And we should avoid it if we can figure out how in time.
For more, see:
Productivity in the Recession and Going Forward, by Paul Bauer and Michael Shenk, FRB Cleveland In contrast to previous postwar recessions that tended to see sharply lower labor productivity growth, if not outright declines, the 2001 and the current recessions have had relatively strong labor productivity growth. In 2001, year-over-year productivity never dropped below 2.0 percent. In the current recession, productivity has remained over 1.9 percent. The sustainability of this productivity growth has implications for monetary policy, the affordability of the Federal deficit, and ultimately our living standards in the long run.This post has been republished from Mark Thoma's blog, Economist View.
Gains in labor productivity (output per hour) come from three sources: increasing the amount of capital per worker (capital intensity); increasing workers’ average level of skill, education, and training (labor composition); and a residual (multifactor productivity) that picks up economy-wide gains in knowledge and organizational methods not captured by the previous two effects. Only annual estimates are available for the breakdown in labor productivity. The post-1995 resurgence in labor productivity has been spurred largely by capital intensity and multifactor productivity. However, the growth for 2007 to 2008 was fueled more by capital intensity and a bit less multifactor productivity. ... [full article]
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