Somebody help me out here: How is it possible that Brad DeLong is now talking about jigsaw puzzles etc. as if that is totally consistent with what he (and Krugman) have been saying all along? It’s not merely that he and Krugman over the last two years have been focusing on Aggregate Demand, while remaining agnostic about the necessity of “recalculation.” No, they have pointed to empirical refutations (in their mind) of the proposition that there are sectoral imbalances. E.g. here’s Krugman from just a few weeks ago:
Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?
The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.
In some ways I think framing the discussion in terms of “structural unemployment” isn’t helpful. It may be better to say that a number of influential people want us to believe that Great Recession is serving some useful purpose — that the economy is “recalculating”, that it’s getting carpenters out of Nevada to jobs where they’re needed, etc….
The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people? If the problem is lack of skill, then highly skilled workers — such as recent college graduates — should be doing well. If the problem is too many carpenters in Nevada, then non-carpenters somewhere else must be doing well. Who? Where?
Well, if there are such people, they’re doing a very good job of hiding.
This is a demand-side slump; the evidence is grossly inconsistent with any other story.
Let me anticipate two possible responses:
(1) “Not all Keynesians are the same, Bob. Krugman and DeLong are allowed to disagree with each other, since they are actual scientists, unlike you ideological Austrians.” No, not on this point. I’m not going to bother digging it up, but for sure DeLong has pushed the exact same argument in the past. He has written that if our current malaise were due to sectoral imbalances, then we’d see excess supply in some sectors and excess demand in others. But we don’t, ergo it isn’t about a need to move resources around.
(2) “It’s not an all-or-nothing proposition, Bob. One can consistently say that the economy suffers from misallocated resources and that the best way to reallocate them is to restore Aggregate Demand.” No, not according to Krugman above. Go re-read him. He’s not saying, “This is only one component among several.” No, he says the Fed evidence is “one more nail in the coffin” of the recalculation theory. Unless you’re talking about Dracula, people don’t take naps in coffins–they go there to die. You don’t take a secondary explanation–that’s worthy of a full article unto itself–and put it into a coffin.