Wherein Both Delong and Fernald Confuse Me

September 22nd, 2014 at 6:20 pm

Not hard to do–and nothing against either of those big brains–but I’m confuzzled by this post from Brad.

The question–or at least one of the questions–is a) whether there’s hysteresis in play and b) whether reverse hysteresis can be invoked to repair some of the damage. I’m too rushed to go into explanations of terms etc. right now, but John Fernald–my go-to guy on growth theory and evidence–seems to be arguing that hysteresis cannot legitimately be invoked because the slowdown in potential growth occurred prior to the great recession and the damage many of us, including Brad_1, think it did to supply-side inputs (there’s the hysteresis).

Now, Brad_2 seems to be saying he’s not so sure, and–here’s the confusing part–he quotes John as follows (my bold):

Utilization by any empirical measure is where it was a decade ago. And my informal polling of firms doesn’t suggest a lot of slack within companies—they’ve adjusted to the weakness of demand by reducing headcounts and capacity. So you might be offended by the [sharp, sudden] changes in trend, but they’re in the data [and in the world out there].”

Let’s say John’s informal polling is right/representative. Doesn’t that just mean that with greater demand from C, I, G, or X-M they’d adjust to that too, as in reverse hysteresis? Suppose we could lower the dollar and thus the trade deficit, all else equal, or we borrowed a did a big public investment program. Why wouldn’t that increase demand, employment, wages, incomes, and spiritual enlightenment?

By invoking weakness in demand, is John not implicitly saying the constraint is not wholly on the supply side and that reverse hysteresis is possible?

I await reverse confuzzlement by Brad and/or John.

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10 comments in reply to "Wherein Both Delong and Fernald Confuse Me"

  1. Larry Signor says:

    I am always left “confuzzled” by Brad and John, but I am a carpenter, not an economist.


  2. Carl says:

    I am not an economist, and call me crazy, but how about if some of the money to be saved this upcoming fiscal year by the Treasury curbing inversions is spent on infrastructure, we might find out if demand is holding back the economy…?

    http://www.nytimes.com/2014/09/23/business/treasury-creates-new-hurdles-to-inversion-moves.html?emc=edit_na_20140922&nlid=54412143&_r=0


  3. Peter K. says:

    The bolded part of the quote isn’t showing up in my web browser. We’d see wage increases if there wasn’t any slack and inflation I’d imagine.


  4. urban legend says:

    How does what happened in World War II — putting everyone to work, including 10 million young men as soldiers and millions of women who previously had only worked in the home — not prove your point?


  5. Robert Salzberg says:

    Economists should sometimes step away from the charts and models and see the big picture.

    America has been starving its infrastructure by more than 1% of GDP for decades. All that decrepit infrastructure has real costs. The American Society of Civil Engineers estimated that if we continue our current spending path, our infrastructure will cost the average American family $28,000 between 2013 and 2020 or an average of $4,000 a year.

    http://www.infrastructurereportcard.org/a/#e/how-we-use-infrastructure

    The International Labour Organization has a detailed report on what’s responsible for the declines in global labor’s income, here’s a highlight from p.51:

    ” in the case of developed economies.. global financialization contributes 46 per cent of the fall in labour income shares, compared to contributions of 19 per cent by globalization, 10 per cent by technology and 25 per cent by changes in two broad institutional variables: government consumption and union density.”

    http://www.ilo.org/wcmsp5/groups/public/—dgreports/—dcomm/—publ/documents/publication/wcms_194843.pdf

    Financialization is sucking about 3% more of GDP from our economy than a few decades ago while delivering more instability. Poor infrastructure is crippling our ability to compete. We’re also paying around 8% more of GDP towards health care than we should and paying about 2% of GDP more on the military and the Department of Homeland Security than we should.

    Add in our poorly functioning primary schools, crippling student debt, and dysfunctional Congress and the real question is not why is our economy doing so poorly but how have we held up so well? (Bubble, Bubble, burst and repeat.)


  6. Robert Salzberg says:

    The American Society of Civil Engineers estimated that we need to spend $3.6 trillion on our infrastructure by 2020. If we stretched $3.6 trillion in spending over 10 years it would be roughly 2% of GDP without factoring in the multiplier.

    With borrowing at historically low rates and construction unemployment still very much elevated, spending money on infrastructure is as close to a free lunch as you get in economics. Worse still, every second of delay adds additional costs.

    Somehow, some way, we need to put rebuilding America at the top of the policy heap to improve our economy and put people back to work.

    Our current secular stagnation is entirely due to delusional economic theory ruling our country instead of Econ 101.

    http://www.infrastructurereportcard.org


  7. John Daschbach says:

    Jared, I think the point Brad and John are making is reasonably clear. The are concerned with what is the time dependent value for Potential GDP. Although the figures in Brad’s post sometimes use duplicate headings it’s the one near the bottom “Potential Output Estimates” (with no Figure #) that is most important. If this is a better representation of reality than the first of the “Figure 2” entries then it is a very different world. In all graphs in Brad’s entry there is an output gap, but the gap is much smaller in the late figures.

    How does one asymptotically approach the output gap without overshooting? It clearly depends a great deal on the magnitude of the output gap and the time constants for non-direct labor factors in productivity to manifest. I think that is the point John Fernald is trying to make. As the output gap approaches zero the marginal impact of employment increases goes to zero. (Anyone with children is familiar with this. e.g. we are going on a trip then total productivity is higher (and my total effort lower) if I pack everyone’s bag than if I increase employment (delegate)).

    My belief is that in a developed economy the marginal value of high productivity increases and conversely the marginal value of low productivity can approach zero. As most people who have worked in volunteer roles understand, it’s often best for the most productive to do all of the actual production. The same is likely true for the economy as a whole. But the economy as a whole doesn’t treat those who are not productive as favorably as most volunteer organizations do.


  8. Tiree says:

    US corporations don’t no stinkin US infrastructure. They can use China’s and India’s infrastructures!


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