Romer: ‘The president seems to have developed his own view’
The initial round of publicity for Ron Suskind’s “The Confidence Men” mostly had to do with juicy stories of dissension within the White House. Now that the book is actually out, we’re seeing some of the meatier revelations, including that President Obama confounded some of his economic advisers — notably Larry Summers and Christina Romer — by arguing that high unemployment was driven by rising productivity. “The president seems to have developed his own view,” Romer said, or at least is reported to have said.
Suskind doesn’t give enough detail to say what, exactly, Obama was arguing here, but there are at least two options:
1) Short-term recovery was being impeded by corporations squeezing more and more work out of fewer and fewer workers. This was unambiguously a factor through 2010. As my colleague Neil Irwin wrote in March of that year, “Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek. That means high-level gains in productivity — which in the long run is the key to a higher standard of living but in the short run contributes to sky-high unemployment.”
2) The underlying economic problem was, or perhaps is, productivity gains across the workforce. As Matt Yglesias writes, “The way this story goes is that we had steady productivity gains going back 10-15 years, related both to Asian manufacturing and to technological change. This freed up workers to go do other things. But instead of putting the workers to productive uses, they went off to toil in an unsustainable boom in housebuilding. When this boom collapsed, what we were left with was not 1-2 years of productivity growth but an entire decade’s worth of displaced labor.” Here are some graphs providing evidence for this thesis.
What’s important to note, however, is that neither explanation is inconsistent with a view of the crisis in which insufficient aggregate demand is the major problem right now.
In the first case, companies didn’t believe demand would come back — and in fact worried that it might fall further — and so rather than hire more workers in anticipation of more sales, they simply drove their current employees harder.
In the second case, the housing bubble popped and demand fell through the floor and so there was a massive increase in unemployment. The first order of business is to get demand back up so unemployment can reach a more natural level. That’s more or less the phase we’re in now. The second order of business is to figure out where all of those workers go. Some people believe we need to invest in new industries such as green energy and biotech, some believe we need to devalue the dollar to juice exports or come up with a plan to revive American manufacturing, and some believe we’re simply trapped in an unhappy limbo while we wait for the innovations of the last two decades to generate a substantial number of new jobs.
There’s also an argument that we don’t have any underlying imbalances in the economy and we’re just stuck in a shortfall of aggregate demand. I’m not of that view, but the important point here is that all of these views imply the same demand-stimulating policies in the short-term. In fact, my hunch is that most of the folks who think demand is the whole of the problem would probably agree with their counterparts who worry about rebalancing when it comes to the specific policies that are worth pursuing to increase growth and build new industries in the long term.