And Dean Baker was doing so well…

But at the very end, in his conclusion, he misses out:

The argument that unemployment is due to a skills mismatch leads to very different conclusions about economic policy than the view that the main cause of unemployment is insufficient demand.

The former sees the problem as being with workers while the latter view focuses on the need for economic policy to increase demand.

While many people in national policy debates have been anxious to put forward the skills mismatch argument, it is difficult to find evidence that supports this position. The evidence is overwhelmingly consistent with the simple view that the collapse of the housing bubble has led to a large shortfall in demand. In this context, measures that focus on improving skills will have little effect on overall employment.

The evidence clearly does NOT show that. By the time demand took a big hit, when the Fed let nominal spending (NGDP) tank, the collapse of the housing bubble, which brought residential construction employment down with it, had already run most of its course. The charts illustrate (monthly NGDP from Macroeconomic Advisers).


New York Fed Dudley has conceded that the sluggish recovery is due to monetary policy. Now he only has to acknowledge that the “Great” attached to the recession was also the result of inadequate monetary policy.

13 thoughts on “And Dean Baker was doing so well…

  1. OK Marcus, what’s your excuse this time ;D

    Shamefully I only just retweeted you for the first time. And discovered you have a Twitter account. Please accept my follower request!

  2. Marcus, I don’t know if you realize this, but if you’re tweeting your blog posts – no one can see your tweets as long as you’ve got your account locked. Only people whose follower requests you’ve accepted (thanks!) can see them. You should unlock your account, like Lars and David have.

  3. @Marcus,

    I usually like your posts, but I think this one is a little bit overconfident about your own model/beliefs about the current depression. I think there were several very important details about the crisis, which includes things about housing and debt, in addition to aggregate demand. The fact is that household debt peaked around the time of the crisis and much of the reason is linked to bank lending for mortgages (buying a house or financing consumption). NGDP declined, as you say, which exacerbates the problem of ability to pay for debts while still keeping up consumption. I think keeping aggregate demand on its level path would have made these more manageable issues, as people shift their behavior and gradually bring down debt levels to a more reasonable level. Yes, NGDP is the main problem and was around the beginning, but once things got moving, the NGDP gap widened. The answer remains the same, but these factors contributed to our slow recovery.

    • JJ, “Yes, NGDP is the main problem and was around the beginning, but once things got moving, the NGDP gap widened”. We basically agree. The Fed let the gap widen because it didn´t act as a ‘fire preventer’. And now the recovery is slow mostly because the Fed feels it´s more constrained by the 2% than by the 8%!

  4. Bah. You need to throw mortgage liabilities on the first chart. If you do that, you’ll find that it was the point at which home prices fell far enough to put millions of home owners into a negative equity position that the saving rate jumped and consumption collapsed. This was going to happen whether or not the Fed targeted NGDP. It may have been different if the Fed somehow stopped the slide in home prices? Is that your position?

    • Joe, I don´t think so. Mortgage, or any other liability, is a “derived” process, dependent on the underlying economic conditions. Note that mortgage liabilities peaked at the same time as spending (NGDP). And by that time house prices – C-S National – which had peaked 30 months earlier had already dropped about 22%! But the economy was still holding up rather well.
      There is a nice symetry with the 1960s: Then, an unemployment obsession brought on the “Great Inflation”. Now, under Bernanke, an inflation obsession brought on the “Great Unemployment” (or recession)!

  5. Do you have any comment on this presentation by Mary Daly, a labor economist and Associate Director of Research and Group Vice President at the Federal Reserve Bank of San Francisco?
    She marries the assertion that the labor force is declining as a result of boomer retirement to the effects of the Great Recession on the labor participation and draws a conclusion are the impact on the Federal budget.

    • Sorry, I had an episode where my fingers get a mind of their own – what I meant to say is that she draw a conclusion about the impacts of these on the Federal budget.

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