But Narayana Kocherlakota Was Supposed to Be the Really Smart and Reality-Based Minnesota Economist!
This was something that John Stuart Mill and Jean-Baptiste Say had gotten right in 1829.
Our problem is not that there is a shift in demand from construction to manufacturing, and we have to move workers from construction to manufacturing. Our problem is that there has been a shift in demand from currently-produced goods and services to safe high-quality assets and that as a result workers in goods-and-services-producing industries have been fired. There is no counterbalancing sector in which demand for employment is high, for what is in demand is high-quality safe AAA assets, and the lack of trust in the private sector is so great that no private business can make money by putting people to work creating high-quality safe AAA assets.
The only organizations that can do so are the solid gold governments of the world in which investors have confidence.
Yet at least seven of the seventeen people at the FOMC meeting do not get this.
This is tremendously disturbing. What is also disturbing is that there are only seventeen and not nineteen people at the FOMC meeting.
Hangover Theory At The Fed: This Jon Hilsenrath piece on the Fed is an impressive piece of reporting; it seems that somebody is talking out of school. And as Tim Duy says, it’s also depressing for anyone believing, as I do, that we’re sliding steadily into a long-run low-growth, high-unemployment trap, and that aggressive action by the Fed is urgent. But one more thing struck me: at least some members of the FOMC have bought into the hangover theory — the modern version of liquidationism in which mass unemployment is somehow necessary in the aftermath of a burst bubble:
Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted.
Here’s what Kocherlakota said in a speech after the meeting:
Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
I tried, in that old piece on hangover theorists, to explain what’s wrong with this view in general. Among other things:
this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.
And this is strikingly true this time around. Kocherlakota would have us believe that there’s a big problem of mismatch because manufacturing is trying to hire, while construction has slumped.... Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.
Unfortunately, we’re not having an academic discussion here: right now, bad theory — theory completely at odds with actual experience — is having a real effect in blocking action.
As I said, if John Stuart Mill and Jean-Baptiste say can get this right in 1829, why can't Narayana Kocherlakota get it right in 2010?