Every recession involves a reorganization and restructuring of the economy. In a standard recession, this involves a larger-than-usual number of companies going broke, and workers needing to scramble for different jobs. But the restructuring in the pandemic recession–and in continuing restructuring in the pandemic that has continued even though the pandemic recession ended back in April 2020–is of a different sort. There are new dividing lines across the labor force like who can work from home, and what sectors of the economy have been more affected by the pandemic on an ongoing basis, and whether parents can rely on sending their children physically off to school. There are concerns about what working environments are more or less safe.
And every recovery involves discovering new patterns of sustainable specialization and trade, requiriing entrepreneurial trial and error.
“[R]eorganization and restructuring of the economy” takes place constantly, not just during a recession. It is always true that jobs are churning, methods of production are being revised, products are being discontinued and new ones introduced. Recessions/recoveries are less special than Taylor supposes.
Yes, of course churn and the evolution of new methods of production never stop. Tim Taylor and Arnold are well aware of that. I think you are not really seeing their point Philo.
What makes recessions different is that much of the very same specialization that makes the economy and individual workers increasingly more efficient during times of prosperity leaves them in economic dead ends when recessions upend trade patterns that turn out to be unsustainable and turn a lot of previous specialization into liabilities.
Recessions are periods when this effect is much increased due to a disruption of some kind. At such times a much higher percentage of the work force finds itself mismatched to the jobs on offer. This in turn has other pernicious ripple effects in finance social cohesion that take some time to work out. Eventually new specializations are learned and the economy improves.
I think the original insight here in Arnold’s work is that , just as financial investment is crucial but over investment can be pernicious, specialization is also necessarily a double edged sword. Over investment often works great until it fails. Same with over specialization.
I think this is a deep and under appreciated insight on Arnold’s part. It is certainly not any kind of denial that churn and innovation are continuous at some significant level.
–“At such times a much higher percentage of the work force finds itself mismatched to the jobs on offer. This in turn has other pernicious ripple effects in finance social cohesion that take some time to work out. Eventually new specializations are learned and the economy improves.”–
The problem here is that people need gainful employment at all times, not just when job skills are matched to open jobs. This is particularly true of men, who need not only work, but well paying jobs to have a reasonable chance of finding women who will want to start a family with them, and to provide for that family.
I know this falls afoul of ‘markets fail, use markets’, but if the market cannot provide a good paying job to all well meaning and industrious men in the prime of their life, then we need some other institution, such as state owned enterprises, to step in and fill the gap.
Aside from this, there ought to be a secondary employer of last resort, which will offer jobs to anyone willing to work.
The efficiency of markets being what it is, we wouldn’t want the economy to be dominated by SOEs, but there should be enough labor demand such relatively few men who are motivated to make something of themselves will not be able to find a job generating $60K+ by their mid 20s.
specialization is also necessarily a double edged sword. Over investment often works great until it fails. Same with over specialization.
Example #373: the orang utan
You seem to embrace the theory that recessions are caused by some sort of shock to the economy of the “creative destruction” type—that suddenly there is more of this revolutionary upsetting of the economy than usual. I think that is rarely what is happening in a recession; rather, malfunction of the monetary system causes a shortfall in spending. A Klingian recession is possible, but very rare; monetarist recessions are the rule.
You seem to view shocks to PSST as causing recessions.
The other and older view is that recessions happen and disrupt PSST because they destroy firms and jobs (because perfect insurance is impossible). These are the scarring effects of a recession. I view them as mostly inefficient. Recessions do permanent damage.
The standard pattern of a slowly dropping unemployment rate in recovery is consistent with PSST. New firms and new jobs need to be created.
There is no recession that ongoing process of PSST can’t happen in an expansion. We saw a huge impact of the tech surge in the late-1990s, a round of PSST, but the economy boomed. PSST does not cause recessions.
Our task as economists is to figure out how to reduce the frequency and severity of recessions, so that the PSST process can continue more efficiently.
My guess is preventing credit-fueled investment bubbles is an important part of preventing recessions.
B.B., the best way to reduce to frequency and severity of recessions would be to to freeze the economy in place, prohibit innovation in the large and prohibit any smaller changes involving product enhancements or cost reductions. Eliminate competition too, as that creates winners and losers.
I agree with Greg G that there are trade offs in specialization so that one might think in terms of an “optimal” degree of specialization. But of course ham-handed government cannot know and ought not target such an optimum. One might argue in some abstract sense that although private firms internalize trade offs in specialization (seeking to avoid bankruptcy liquidation), their choices impose negative externalities on other firms. Maybe. But let’s not fall prey to the pretense of knowledge by imagining government intervention could solve this “problem.” The best course would be to relax regulatory sclerosis to allow the economy to adjust to the new PSST equilibrium.
Dr. Kling’s writings on PSST are a monumental achievement that should (and perhaps eventually will) be taught in macroeconomics courses. Not entirely novel, as Dr. Kling stands on the shoulders of giants like Hayek and Mises, but a superbly crafted synthesis.
…the best way to reduce the frequency and severity of recessions would be to freeze the economy in place, prohibit innovation in the large and prohibit any smaller changes involving product enhancements or cost reductions. Eliminate competition too, as that creates winners and losers.
I’m more on B.B.’s side. I’m a bit suspicious of claims that recessions clear out the dead wood in favor of something better; seems an example of “in spite of” rather than “because of”. Plenty of innovation and improvement in good times compared to recessions; the loss of legacy systems has done harm.
Continuing beatings until innovation improves hardly seems like a good business model.