Rajan on Lessons from Recession: paper reads to me like nonsense on a stick. Ostensibly its about the ineffectiveness of attempts to stimulate demand and induce recovery in advanced Western economies. By my reading it is a litany of complaints about the current political economy of the United States and Western Europe. If this was story about why real wages are stagnant, why there is widespread social unrest, or why the current state of affairs is simply displeasing to Rajan’s aesthetic then we would have something….
[W]e can argue about government and finance, but there is no evidence that the residential construction sector is bloated. A cursory look at actual production levels would tell you that United States is producing far too few homes. If you don’t trust that then you can look at prices. Rents – the price of the service flow from housing – are rising rapidly against a backdrop of depressed demand and high unemployment…. [T]he idea that a problem facing the US is that it is spending too much capital and labor on residential construction is directly at odds with the facts. This is important because it provides a window in the virtue vs. vice thinking that pervades this piece and much commentary…. What’s wrong with this type of thinking is not that it heaps blame upon the guilty, but that it encourages intellectuals to get away with slip-shod mechanics. Virtue and vice are human judgments, not actual forces in the world. Natural phenomena must have natural explanations. This requires tracing down the effects of impersonal forces. And, perhaps actually taking a glance at housing starts or the issues associated with our vacancy rate measures before making pronouncements about which sectors need to shrink.
Second, Rajan writes that the way out cannot be more borrowing and spending, yet he makes no clear case why. If I may be so bold, I assume what’s going on here is standard ant-grasshopper prejudice. It’s the notion that consume evermore without preparing for the future is a pernicious human tendency that must be battled at every turn. Spending of course is not the same as consuming and Rajan pays lip service to that in his “especially if the spending does not build long lasting assets.” Yet, the “especially” is his confession. If the United States had the opportunity to borrow money cheaply in order to invest in highly productive assets would this would not be a countervailing consideration that made it “OK” to borrow. It would be the central consideration and the defining feature of profit maximization. Yet, even in the case that the assets the US wishes to invest in have a low return, its not clear that this makes borrowing a poor decision. if real interest rates are below zero then the return does not have to be great for the borrowing to make sense.
This is compounded by the fact that very little government spending is done on things that people would consider pure consumption. Most tax funded government workers are teachers, firefighters, law enforcement officers and soldiers. We argue about the marginal products of these workers but all of them are in the business of creating or protecting capital. If you are concerned about the future its not immediately obvious that these workers are a drag…