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Politics : Mainstream Politics and Economics -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (8470)	2/7/2012 6:59:20 PM
From: TimF	1 Recommendation Respond to of 85487

Why Obama’s economic thesis is wrong. Demand is not the problem By James Pethokoukis February 7, 2012, 4:07 pm Barack Obama thinks the sickly economy needs more demand. And if more demand can’t come from cash-strapped consumers, then government should provide more demand by borrowing money at extremely low interest rates and spending it. As former Obama economic adviser explained in a recent Financial Times op-ed: What, then, is to be done? This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. … It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand. But what if Team Obama has the wrong diagnosis? Take a look at these two charts from Barclays Capital: These charts are based on the U.S. Job Openings and Labor Turnover report. The first chart shows that with 13.1 million people unemployed, there were an estimated 3.9 unemployed people for every opening. That’s the lowest level since December 2008. Good news. Yet, as can be seen in the second chart, job openings have been rising faster than hiring. As Barclays concludes: “This suggests that factors such as mismatched skills continue to be frictions in the labor market.” Or, in other words, people who lost their jobs in the Great Recession will not be able to return to their old jobs or even new jobs in the same industry. As economist and blogger Arnold Kling notes: Many jobs in home construction, durable-goods manufacturing and distribution, and mortgage finance were dependent on housing markets with ever-rising prices. In the U.S. and the U.K. in particular, the finance industry expanded well beyond its true economic value. Once the property bubbles burst, these jobs were exposed as not viable. Meanwhile, ongoing creative destruction brought about by the Internet and globalization have continued to allow substitution of capital and emerging-market labor for industrialized countries’ labor in many sectors. Together, these phenomena have caused widespread dislocation. … The necessary adjustments can only be made by the decentralized efforts of entrepreneurs. … The Keynesian story would lead one to expect a recovery to consist of workers returning to the jobs that they held prior to the recession. That is not what happened after the Great Depression. It is not what has happened in recent recessions in the U.S., particularly the one that ended in 2009. Regaining full employment requires significant restructuring of the economy, rather than simply returning to the pre-slump status quo. More government spending can at best create some unsustainable jobs in the short run. In the long run, it will only distort and impede the adjustments that are needed to create patterns of sustainable specialization and trade. It will take time for entrepreneurs to create the new companies and industries America needs. And it will take time for workers to train and transition to them. If we can’t figure out policies to encourage both, then we at least need to get rid of policies that discourage. blog.american.com "Demand isn't the problem", is IMO a bit too strong. I would say that real demand isn't aggregate so much as its complex, and that demand in any form is only one issue, and that trying to have the government prop up demand isn't going to work, at best it reduces the severity of the worst of a recession (at a cost later on), but it can't bring back solid growth. We are already growing, just too slow, government stoking demand isn't going to help at this point, even if it possibly could have helped a little at or entering in to the deepest point in the recession (and even then it was slight and uncertain benefit, at a future cost).