From Claudio Borio and others.
The hitherto unsuspected villain in this story is the misallocation of resources – in our case, labour – during the credit boom and its long post-crisis shadow. More generally, the findings support the view that the disappointing developments we have been witnessing may be the result of a major financial boom and bust that has left long-lasting scars on the economic tissue (e.g. BIS 2014, Borio 2014, Borio and Disyatat 2014, Rogoff 2015) rather than the reflection of a structural, deep-seated weakness in aggregate demand.
Pointer from Tyler Cowen.
Yes, this seems to support PSST, but they use methods that are of a sort that I cannot endorse. I do not think that “aggregate” productivity growth is well measured to begin with, and then when you try to decompose that into smaller pieces, you really lose me. Another way of putting this is that aggregate productivity is a concept borrowed from the model of the economy as a GDP factory. If your conclusion is that reallocation of resources matters for economic performance, then that suggests that the GDP factory is not a good model, which in turn makes your methods suspect.
By the way, there will be some discussion of PSST in a podcast I did with Russ Roberts that will come out in a few weeks, which in turn is about my forthcoming book, Specialization and Trade, which will come out early this summer. Meanwhile, you will find relevant papers here.
Is Specialization and Trade available for pre-order?
I still can’t understand what “structural aggregate demand” is other than a swag fudge factor and circular reasoning: spending is down because spending is down. Sounds like a confidence game to me.
The connection of misallocation with credit booms in particular sounds more specifically Austrian than it does general PSST.
Well, I know what I have to write now.
When I saw this item in Cowen’s blog I immediately thought of you, and I share your doubts about their methods. It also made me think about the difference between your PSST and the Austrian theory of the business cycle. If I understand it correctly, the need for a major restructuring of patterns of specialization and trade can be created by the Austrian mechanism, but you would allow other causes such as major changes in technology, institutions (North), and attitudes (McCloskey).
This is false in America. Go to google news and search “construction shortage.” The shortage is of workers, who left the industry in droves during the housing collapse. Also, would-be workers did not do the apprenticeships and get the practice they need to be skilled tradesmen. Now construction wages are rising quickly, as are rents and home prices. Construction is returning to levels from before the collapse, especially for multifamily.
This is what you would expect from a mainstream aggregate supply/demand story with frictions. Are we in another misallocation era now? It’s happening exactly as inflation starts catching up to target and unemployment has come down a lot. The easiest explanation is that there was a big collapse in AD, and now it has rebounded. The new pattern of specialization and trade looks like the old pattern, except with more multifamily and less single-family, but those don’t have very different skillsets.
“The easiest explanation is that there was a big collapse in AD,”
Those are the easiest words,to parrot, but they aren’t an explanation. Of course things overshoot. You can’t seriously believe the original trend was sustainable.
Is there a serious reference that presents AD as a theory of the crisis?