Department of "Huh!?": Raghu Rajan Is a Member of the Pain Caucus, and I Don't Understand Why...
Raghu Rajan:
But this recession is not a “usual” recession. It followed a period of ultra-low interest rates when interest sensitive segments of the economy got a tremendous boost. The United States had far too much productive capacity devoted to durable goods and houses, because consumers could obtain financing for them easily. With households recovering slowly from the overhang of debt resulting from the binge, and with lenders extremely risk averse, it is unrealistic to expect households to spend beyond their means again, and unwise to try to tempt them to do so.
If households are going to want fewer houses, industries such as construction will have to shrink (as should the financial sector that channeled the easy credit). A significant number of jobs will disappear permanently, and workers who know how to build houses or to sell them will have to learn new skills if they can. Put differently, the productive capacity of the economy has shrunk. Resources have to be reallocated into new sectors so that any recovery is robust, and not simply a resumption of the old unsustainable binge. The United States economy has to find new pathways for growth. And this will not necessarily be facilitated by ultra-low interest rates...
But... but... but... construction already shrank!
As of the end of 2010, the construction sector will have shrunk in nominal terms to its size in 1999, when the economy as a whole was only 57% as large as it is today...
As of the end of 2010, the summed deviations of residential construction spending from their long-term trend will be zero: we will have underbuilt relative to trend in late 2007, 2008, 2009, and 2010 by about half again as much as we overbuilt relative to trend in 2003, 2004, 2005, 2006, and early 2007.
Yet the depression will still be going on.
Resources have already been allocated out of construction. To speak of the fall in the size of the bubble sector construction as something ongoing in the future--"will have to shrink... jobs will disappear..."--is to commit an elementary factual error. The sector has already shrunk. And it has shrunk by moving its excess workers and a huge honking number of other workers into the most unproductive activity possible: unemployment.
And to claim that the process by which resources are "reallocated into new sectors so that any recovery is robust..." so that "the United States economy... [can] find new pathways to growth" is in any way aided by 10% unemployment would be simply insane.
John Maynard Keynes had something to say about people who looked with approval on high unemployment and low demand and claimed that they were aids rather than obstacles to restructuring and growth:
While some part of the investment which was going on in the world at large was doubtless ill judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history....
Doubtless, as was inevitable in a period of such rapid changes, the rate of growth of some individual commodities could not always be in just the appropriate relation to that of others. But, on the whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth [of different sectors]... seem to me, looking back, to have been in as good a balance as one could have expected them to be. A few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied....
It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924–29] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.
I do not take this view. I find the explanantion of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...
