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It’s Aggregate Demand, Stupid

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"It’s Aggregate Demand, Stupid"

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David Wessel explains Christina Romer’s view of the economic situation:

Christina Romer, chair of the president’s Council of Economic Advisers, says the reason unemployment remains so painfully high is clear: It’s not the inadequacy or laziness of the workers or the long-standing mismatch between workers’ skills and employers’ needs. It’s the old-fashioned Keynesian diagnosis: Too little demand in the economy.

“The overwhelming weight of the evidence is that the current very high—and very disturbing—levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified,” Ms. Romer said in remarks prepared for a conference at Princeton University today.

Here’s the nominal GDP situation:

Economagic: Economic Chart Dispenser

Brad DeLong remarks:

The view gaining strength is that additional stimulative policies won’t do much good because much of our current employment is “structural.” This is, best as I can see, simply not true: there is no evidence for it. But that if we let unemployment linger above 9 percent for several years, it is highly likely to become structural–and then we will have even more huge problems than we have now.

And at the moment it looks like getting unemployment below 9 percent will take some luck. Certainly fiscal policy and monetary policy are unlikely to provide much additional stimulative force going forward.

Every time there’s a downturn a certain swathe of the elite starts to label it unfixable and structural. And the worse the downturn, the louder come the calls. Look at the history of the Great Depression and you see an enormous chorus of voices from the right arguing that nothing could be done and people would just have to suffer through it. They were countered by a chorus of voices from the left arguing that nothing could be done and people would just have to stage a revolution. It wasn’t true then and it wasn’t true now. The fact of the matter is that key people responsible for running the global economy—people at the European Central Bank and the Federal Reserve Board, and the Bank of Japan, people in the United States Senate, people in the Germany cabinet—are screwing up. In the developed world, those countries who’ve been able to respond aggressively to the crisis with aggressive expansion-via-devaluation are all doing pretty well. The bigger developed economies can’t do that exact thing, but they can mount more aggressive expansionary responses—they just aren’t.

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