Keynesians, Monetarists, and Minskyites: Opening of September 13, 2010 U.C. Berkeley Econ 1 Lecture
Fiscal Stimulus II

The Economic Situation

Karl Smith accurately describes the economic situation, in measured, appropriate langauge:

Rome is Burning «  Modeled Behavior: There is a critical point that I fear the commentariat is just not getting. In my darker moments I fear that some of my fellow economists aren’t getting it either but we aren’t going to go there.... We have very low capacity utilization (75%) and very high unemployment (10%). That is, we have factories sitting idle for lack of workers – low capacity utilization. At the same time we have workers sitting idle for lack of factories – high unemployment. There are machines waiting to be worked and people waiting to work them but they are not getting together. The labor market is failing to clear.

This is a fucking disaster.

Excuse my language, but you have to get that this is a big deal. This is not a big deal like the GOP doesn’t appreciate public goods. Or, Democrats don’t understand incentives. Or some other such second order debate that could reasonably concern us in different times. This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.

Let me say that again because I think it fails to sink in – literally trillions of dollars in value are not being produced. Not misallocated. Not spent on programs you don’t approve of or distributed in tax cuts you don’t like. Trillions of dollars in value are not produced at all. Gone from the world entirely. Never to be had, by anyone, anywhere, at any time. Pure unadulterated loss.

Time and time again I see people speak about recessions as if they are a bad harvest – an unfortunate event wherein we have to figure out how to go with less. Some say we should all sacrifice – some say the sacrifice should be based on X or Y. Some say each family should take their lumps as they come.

However, they are all getting the basic idea wrong. This is not a bad harvest. The problem isn’t that there is less to go around. The problem is that we are creating less, building less, making less.

We have people who would be working but are instead watching Judge Judy. We have machines that could be spinning but are literally rusting for lack of use. This is a coordination disaster.

The question is how do we end this thing as quickly as possible. How do we stop wasting our basic resources (men and machines), day-after-day, month-after-month, year-after-year.

So when I hear this debate drift oft into how Republicans don’t appreciate the value of infrastructure – I suffer infinite eye roll. This is the time for this? You would watch the core economy grind down while you argue over the need to fix a pothole!

When I hear the GOP running some nonsense about how Obamacare is scaring small business I find myself beating back the desire for autodefenestration. Can we let this go already! There are real issues that need to be dealt with.

Now maybe some people want to explain to me how what appears to be a massive market failure is actually something else: a skill mismatch, a great recalculation, etc. I am willing to have that debate.

Of those that agree that this is the result of insufficient aggregate demand we can debate the fastest means of spurring such demand: aggressive monetary policy, payroll tax cuts, something else we haven’t thought of – I am all ears.

However, these are the limits of rational disagreement.

Side arguments that are basically proxy battles for your general theory of government are sadistic tribalistic grandstanding. You chatter and dawdle while Rome burns.

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