On over-thinking economic problems



Our national economy is anything but simple or straightforward. Beyond the relative complexities of various regional interests and federal, state, and local government interventions one must also view the economy against the backdrop of globalizing factors. So in many ways identifying and attempting to correct inefficient market realities can be a complex endeavor.

However, that doesn’t exclude the possibility of a relatively simple explanation to an economic problem. One such case happens to be a very persistent problem right now – mass unemployment. Which happens to have a relatively simple explanation – a deep lack of aggregate demand.

I bring this up because Paul Krugman yesterday makes this point:

There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand.

Which prompts Matt Yglesias to expand (my emphasis in bold):

A lot of well-meaning and intelligent people find that view baffling, and I think it’s because they don’t fully understand what the phrase means. Does Krugman really think America has no economic problems besides inadequate demand? What about … X? What about Y? That’s how you end up with Tyler Cowen arguing that Total Factor Productivity growth has been slow for several decades and David Brooks observing that “The rate of new business start-ups was declining even before the 2008 financial crisis.” Understood properly, it’s perfectly easy to align these views. The way it goes is that in 2007 the American economy had some problems but it wasn’t suffering from mass unemployment. Now, four years later, we continue to have many problems that aren’t inadequate demand but the specific problem of mass unemployment is the result of inadequate demand.

It really is that straightforward. Presenting other examples of economic problems is just that – presenting other problems. So when pundits and politicians prognosticate on regulations, taxation, manufacturing, etc they are primarily speaking in terms that are besides the point as far as mass unemployment is concerned.

The unemployment rate:

And the unemployment level versus job openings (JOLTS):

We have mass unemployment because there are too many job seekers and not enough jobs. Recession>layoffs>demand shock>mass unemployment. Period.


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