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Recessions Cast Shadows, So Action to Fight Them Should Be Aggressive

Tyler Cowen makes the case for aggressive stimulative government policy to nip recessions even before they are in the bud--for what starts as an aggregate demand failure turns, over time, if not corrected, into an aggregate supply failure.

Somehow, however, he does not seem to understand that that is the case he is making:

I would stress the point that the optimal inflation target falls as a recession proceeds.  Whatever you think of four percent inflation in absolute terms (I have favored two percent, though not four), it would have done much more good a year or two ago than it can do today. There is an asymmetry between layoffs and rehires. If an economy starts heading into recession, robust aggregate demand may limit the number of layoffs. But once those workers are laid off, robust aggregate demand won't necessarily lead to their rehiring. The employer already has figured out how to do without those workers and the production process has "moved on," so to speak.... The laid-off workers have to find new and different jobs, which often means cross-sectoral adjustments. Laid-off workers become frustrated, lazier, less healthy, and so on -- hysteresis -- which also makes for required real adjustments, since now they are less productive.... "Even a shock which was originally one hundred percent "nominal" becomes increasingly "real" as time proceeds"...

via www.marginalrevolution.com

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