Daily Archives: 07/31/2010

Short run Stimulation: Fault Lines by Raghuram Rajan – Fault Lines by Raghuram Rajan

Our economic problems seem to be more than just lack of demand, also lack of supply of some resources.  Labor is not a lump but divided into groups with different skills.  This may reduce the ability of Keynesian policy to work.  We need to avoid creating the basis for a new crisis in responding to this one.

From Fault lines:

First, as much as a shortfall in aggregate demand, the United States seems to have a problem with supply. The pre-crisis boom exaggerated demand for housing (as well as commercial real estate), for durable goods, as well as for financial services. Many of the unemployed were employed in housing related activities, many of them relatively low skill jobs like construction. They need to move to find jobs elsewhere, and perhaps need to be retrained. Newspapers are full of stories about how many high skilled jobs are going a begging because there are not enough people trained to fill them. So unlike the ordinary recession, just boosting demand may not do the trick unless the intent is to recreate the unsustainable patterns that prevailed before the crisis… Bottom line: The United States probably needs more structural transformation, including improving the quality of its rundown infrastructure, and more investment in improving education and retraining. More crisis spending could have been oriented towards these goals. Unfortunately, there is little appetite now for even sensible additional spending.

Chicago Booth Blog: Fault Lines by Raghuram Rajan – Fault Lines by Raghuram Rajan.