Adjustment happens, but it’s a far more painful process than the models and textbooks have imagined. Policy, and the economists, should take it seriously.
Pointer from Mark Thoma.
Difficulty with adjustment is the essence of the PSST story for recessions. If the economy were a GDP factory, then the factory foreman would be temporarily confused about which job to give to which person. Of course, for the factory foreman, substitute the set of entrepreneurs and potential entrepreneurs.
Muro cites three recent papers, two of which I have covered. The new one is by Danny Yagan, who writes,
living in 2007 in a below-median 2007-2009-fluctuation area caused those workers to have a 1.3%-lower 2014 employment rate. Hence, U.S. local labor markets are limitedly integrated: location has caused long-term joblessness and exacerbated within-skill income inequality. The enduring impact is not explained by more layoffs, more disability insurance enrollment, or reduced migration. Instead, the employment outcomes of cross-area movers are consistent with severe-fluctuation areas continuing to depress their residents’ employment. Impacts are correlated with housing busts but not manufacturing busts, possibly reconciling current experience with history. If recent trends continue, employment rates are estimated to remain diverged into the 2020s—adding up to a relative lost decade for half the country. Employment models should allow market-wide shocks to cause persistent labor force exit, leaving employment depressed even after unemployment returns to normal.
The standard remedies for adjustment, including trade adjustment assistance, and worker re-training, are among the least effective programs government has ever tried. Not surprisingly if decentralized entrepreneurs are having calculation problems, the socialist calculation problem proves worse.
PSST is your term for it, but there is an old literature on this that likely predates your heuristic. Davis, Haltiwanger, and Schuh covered this in their 1996 book (and cited even older work in the area), and progress on the topic has continued with the growth of administrative microdata availability. Indeed, the results on trade adjustment were not so surprising to those familiar with the large and growing literature on declining reallocation rates.
’96 eh?
Hey, that is old- even Prince was still alive then.
I suspect Arnold might say that some things that were known, understood, or just felt 200 years ago but are lost to dead end roads of inquiry and have to be re-learned.
Arnold. If it is catching on, be prepared for every school to claim it was already well-represented in their theories.
Retraining? How about just letting banks lend mortgages again so they can just go back to building houses?
More like non adjustment is the story of recessions. Nothing happens until they are over.
This is akin to saying that in a factory doing a changeover nothing is happening.
So factories now reconfigure themselves. That is progress.
No. If I were a vulgar Keynesian I’d sit at the loading dock and conclude that because there aren’t as many unsold boxes stacking up that the factory must be idle.
And that the government should buy all those boxes and order even more until the plant reaches full capacity again.
No, they would wonder what all that supposed investment was being spent on that resulted in no spending, knowing that if they were actually investing, they would be spending more.
And conclude that must be investment by sitting on their hands.
How does PSST differ from ‘evolution’?