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Monday, January 31, 2011

You Can Believe in the Terribleness of Bubbles and Bursts, or That We Are Facing Mainly Cyclical Unemployment Only, But Not Both

Today I'm giving a lecture on unemployment - and a portion of it will be devoted to this year's hot debate about whether or not our unemployment situation is mainly a cyclical or structural problem.  Many economists, even those in the mainstream who have always been loathe to think about the importance of bubbles and their formation, believe that one of the causes of the crisis or at least one of the aides of it was the forming of the housing bubble over the previous decades.   Many of these same economists say though that our unemployment problem is mostly just good ole' 'not enough demand' cyclical unemployment.  My questions is, and this is aimed at Krugman, if it was wrong for the Fed in 2002 to create one bubble to 'correct' the burst of the other, why is it correct today?  You can't believe bubbles (of the scale we had seen peaking in 2007) are bad, and then essentially opt to throw more money at it and potentially re-inflate it or a new one.  Bubbles are, by definition, structural issues - and their implosion creates structural deficits of employment etc.

There is but one conclusion:  Krugman and his ilk either don't really believe bubbles and bursts (either in the vein of Austrian or in the vein of Minsky) are all that scary for economics, or he is simply choosing to ignore the structural problems and unemployment they cause because it doesn't fit his ideology.   Seems likely to me that there is a mix of structural and cyclical unemployment going on - whether one egged on the other, I don't know - but regardless, you can't fight bubbles and cyclical unemployment at the same time.

By easing one, you risk creating or enhancing the other - that is the problem economists now face.

8 comments:

Anonymous said...

What if it was the Bubble that was feeding economic demand that fired off keynesian animal spirts. I.E. the valuation of homes had little DIRECT effect on the economy, but consumers (and banks) feeling the values fall, caused them to increase their liquidity preference, starting off a keynesian recession. Thus the Bubble wasn't a direct cause, but an indirect one. Can't one believe that and still be consistent?

Ben

Kids sunglasses said...

Many of these same economists say though that our unemployment problem is mostly just good ole' 'not enough demand' cyclical unemployment.

Garth said...

I'm not sure.....I think right-wing economists think a lot of it is structural, and I think left-wing economists think its cyclical...I have yet to see a convincing, objective, study...it is probably too soon to tell anyway.

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