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DeLong Smackdown Watch: Structural Change and Macroeconomic Vulnerability in the 1920s and Today Edition

Scott Sumner protests that I am giving an overly generous reading to Stiglitz in Vanity Fair:

On empirical grounds almost every single step in this argument is wildly implausible. And that’s not hyperbole; I don’t mean one step, I mean every single step…

I think that if you strip Greenwald-Stiglitz (or perhaps the argument that Greenwald-Stiglitz ought to be making) down to its core, it goes like this:

  1. There are times in which important sectors (agriculture, manufacturing) see secular absolute--not just relative--declines in employment.

  2. In these times there are a bunch of reasons--added uncertainty because profitable investment can no longer proceed along established channels, rises in savings rates because income is redistributed to rich winning sectors, rises in savings rates because of balance sheet and bankruptcy effects--that tend to push average savings rates over the business cycle up and average investment rates down.

  3. Hence the natural rate of interest that produces full employment will be on average low in such times.

  4. This means that even a small adverse monetary or other shock that pushes the natural rate of interest down further can easily land you on the lee shore of the zero safe nominal interest rate lower bound.

  5. And then you are fracked: totally fracked.

As I said, I don't think that this Greenwald-Stiglitz channel--which I tend to think of as a Michael Bernstein or perhaps a J.A. Hobson channel--is a first-order underlying cause of either the Great Depression or today's difficulties. It seems to me to be a second-order complicating factor at most, but I could be wrong.

I would also notice that from one viewpoint Stiglitz has rocketed himself around the closed Friedmann universe and is now approaching Austrianism from the unexpected direction of the Galactic South: that the recalculation requirements of rapid structural change put the economy in a configuration in which it is more vulnerable than usual to monetary shocks, and in which monetary policy is less powerful than usual in repairing the damage.

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