This graph comes courtesy of John Mauldin (hat tip: Tyler Cowen, who sees it as evidence for his “Great Stagnation” story). Note that, as should be obvious, public sector revenues vary with private sector GDP while public sector expenditures do not. We have now lost a full thirteen years of private sector economic growth.
The graph raises all sorts of questions for me including
- How far can real per capita total GDP deviate from real per capita private sector GDP before total GDP becomes meaningless?
- What to do about an elusive recovery in real per capita private sector GDP? The correlation between increased public spending and growth in the private sector is a weak one.
If there is better evidence that we continue to be in an L-shaped recession, I don’t know what it is. I think I’ve been pretty clear that my confidence in the Keynesian explanation and remedy for our economic woes is becoming increasingly shaky and that I think that serious structural change is necessary.
Just a question: Do you mean Keynesian or neo-Keynesian? I believe there’s a difference in what Keynes prescribed for such situations and what has been done. (I don’t just mean the counter-cyclical stuff, either.)
In this context I don’t think it makes much difference. I’m specifically referring to an aggregate supply-aggregate demand explanation (AS-AD). My recollection is that what Keynes actually prescribed was the government as hirer of last resort rather than consumer of last resort.
The actual real world prescriptions, whoever they’re being made by, appear to be “folk Keynesianism”.
My recollection is that what Keynes actually prescribed was the government as hirer of last resort rather than consumer of last resort.
That’s what I was remembering. That seems much more reasonable than what has been done. However, it also requires people in charge who actually know how to do things, which seems to be a disqualifier for elective office these days.
This goes back to the argument between Mankiw and Krugman. Mankiw made the point that the recession might be more of a “unit root” problem. That is, the deviation would be permanent. The idea is we have too much housing and too much in the financial sector and that we need to downsize that. And much of that investment might be somewhat sunk (i.e. it is going to take time to retrain people, people to find a job and get back to what salary they had in the financial sector–if they get back at all) and so forth.
Krugman poo-pooed the idea with his usual vitriol saying that it was simply the lack of demand. Which might be true, but Mankiw’s position is a bit more subtle. Mankiw, could I think, argue that the lack of demand is because there are jobs being shed permanently in the financial and housing sectors. That is going to put a damper on demand to be sure. But trying to pump up demand in that case is like dealing with the symptom vs. the underlying problem. And if you try to pump up demand by propping up housing and the financial sector you are in a sense pissing away good money after bad.
But WTF do I know, I’m just a juvenile libertarian type who has never grown up.
I think that’s a great example of the inherent conflict between Keynesian strategies and political realities. Keynesian strategy may say that you need to increase aggregate demand but the political reality is that the squeaky wheel not the efficient wheel gets the most grease. When people are unemployed in the construction and financial sectors the irresistible but futile temptation is to attempt to alleviate that.
Therefore, an attempt is made to boost aggregate demand by giving a hand up to the construction sector or the financial sector or the auto manufacturing sectors and so on and so on. But there’s a hole in that balloon and when the subsidies stop the sectors just deflate again.
I sometimes think that Keynes was correct, but just for his specific situation. When we started at near zero public debt, it was more feasible to increase public spending. We start in a much different place this time. We start with both large public and private sector debt. I am pessimistic that there is a real solution to this. The main value of deficit spending in this situation is a soft landing, and perhaps to keep some chronically unemployed from turning into permanent unemployed.
Steve
The main value of deficit spending in this situation is a soft landing, and perhaps to keep some chronically unemployed from turning into permanent unemployed.
It’s too late for that. If you’re over 55 and LTU, you are almost 100% fucked. I’d guess that a good 85% of people between 50 and 54 will never hold any decent job again, with at least half of those never getting any real work again. As you get down into my age group probably about half of us will never have a job again.
Eh, getting tired. Percentages in above comment not expressed correctly. The last line should read
As you get down into my age group probably about half of us will never have a decent job again, with about half of those never getting any real work again.
For definitional purposes, getting a part-time greeter position at a WalMart is something, but it isn’t decent. Doing odd jobs around the neighborhood competing against twelve year-old boys isn’t real work at all unless you can turn it into a larger business, and the days of doing that in numbers large enough to matter are long gone.
And eventually they’ll just stop stopping the subsidies. After all, what American President is going to let GM, BofA, or any of these other ginormous zombies die on their watch? None. Obama wants to be re-elected so he’ll prop them up. The same thing for the next President after him and on and on. Eventually it will become accepted wisdom that these companies have to be propped up. After all, what is good for these companies is good for America, right?