Paul Krugman has a new column in the New York Times on the forming political consensus in the Beltway that the current slow recovery is not caused by a lack of large expansionary fiscal stimulus (or monetary stimulus), but from structural unemployment.
A few further thoughts inspired by the sad revelation that Beltway conventional wisdom has settled on the proposition that high unemployment is structural, not cyclical, even though there is now a bipartisan consensus among economists that the opposite is true….
[T]here is now a much stronger consensus that unemployment is cyclical, not structural, than there was a couple of years ago. I mentioned Eddie Lazear’s paper at Jackson Hole; there was also Naryana Kocherlakota’s change of heart (for which he deserves major props — the number of economic analysts willing to change their views in the face of evidence is much too small).
So what we have here is an economic discussion working the way things are supposed to work — slower than I’d like, but still, in the end we did have the professionals concluding that one popular story about the nature of our troubles was wrong.
And the pundit class, it seems, paid no attention. Talking about “structural” sounds serious, or maybe Serious, so that’s what they say, even though the evidence is all the other way. And it’s not even “views differ on the shape of the planet” territory: PBS viewers weren’t even given a hint that the professional consensus exists. It’s as if you had a program on climate and only climate-change deniers were represented.
And maybe we should put this in the context of another debate, the big one over austerity. Here too there has been a rather decisive turn in professional opinion; there are a lot of dead-enders even within the economics profession, but the fact remains that both pillars of the pro-austerity position — claims of expansionary austerity, and claims that terrible things happen when debt crosses some rather low threshold — have collapsed, spectacularly. Yet policy hasn’t changed at all; at best there have been tiny adjustments at the margin in Europe, and in the US we’re still slashing spending in the face of a weak economy.
It’s pretty depressing for those who would like to believe that analysis and evidence matter. The recent evolution of both policy and conventional wisdom on macroeconomics seems to suggest otherwise.
Now, I think Krugman would agree that a (small) part of the slow recovery is from structural changes, but he’s right that most of the continuing unemployment is cyclical, caused by a weak fiscal and monetary response.
What is surprising is that Krugman didn’t state the obvious in this column: if the “Very Serious People” didn’t adopt the “its structural employment, so nothing can really be done” line of thinking, then they would have to admit to being wrong about preaching about the dangers of fiscal and monetary stimulus.
Not everyone is an economist like Naryana Kocherlakota.
PS: The summary of Krugman’s column was copied from The Economist’s View