Likewise the overconsumption theory of recessions makes no sense. On a slightly different matter a frequent commenter writes
I’d rather have economists in charge of the financial system than politicians, if for no other reason than I hate most politicians far more than I hate most economists. But the argument that most of the good times in the past decades were due to economists’ strong hand at the tiller is unpersuasive: anybody can live well for quite some time on credit cards, whether they just run up bills with abandon or do it in a logical and academically justified way.
If I am reading the commenter’s intention right then imbedded in his words is a common misperception. This is a response is to that general misperception not the specific commenter.
I think people are confusing cyclical prosperity with personal luxury. In your personal life you might feel like you are doing well because you have a new house or a new car, etc.
However, this is not how we measure the cyclical wealth of nations. We measure it by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff.
For example, we say that Germany’s economy seems to be recovering. However, consumption in Germany is not rising. Consumption is flat. Working is rising. Employment is rising. That is what it means to be doing well. It means that more people are doing more work.
This is why it makes no sense to say that a recession is inevitable because we overconsumed. Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought.
Some people might say that the “something” is structural readjustment. We have to move towards an investment based economy and there are frictions. However, that story also works in reverse. A country could be consuming too little and then has to suddenly switch away from an investment based economy and will face frictions. Recessions in that story are not a punishment for overconsumption, they are a result of suddenly realizing that you have to shift paths. There are still problems here but they are on a deeper level about more subtle things.
The overconsumption theory by contrast says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. Its balance.
Steve Waldman says I shouldn’t tell people that economics is not a morality play. How about this then – that morality play is completely F-ed up. That morality play says that we should sit on the couch and rest our backs because that way we’ll learn not to drink so much. You bought too much so now you have to work less. How does that balance anything?
On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.
If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation then there would be no recession. There is a recession because fewer factories are being built. There is a recession because less work is being done.
Let me be very clear about this. I am not saying that it might seem as if the world works according to common sense but when you study hard and look at lots of equations then you will see that in some abstract way it is wrong.
No, not at all.
I am saying the overconsumption view is completely at odds with what is in front of our faces. It doesn’t even make basic logical sense. The morality play is one without any morals.
I don’t know if Andrew Sullivan still reads my posts but I want to cajole him into responding because I sense that he is sympathetic to the overconsumption view and I know he understands that “To see what is in front of one’s nose needs a constant struggle”
The overconsumption view is an example of just that. If we consumed too much then shouldn’t we need to work extra hard? Why is society working less? What about spending too much money implies that the natural reaction is that people should go home and sit on the couch?
Even Casey Mulligan – who subscribes to a completely different view of the macroeconomy – is trying to tell a story involving the minimum wage and mortgage modifications that answers this key question:
WHY ARE PEOPLE WORKING LESS?
Update: This post is attracting more attention than I expected. Perhaps, I should venture non-technical rants more often. However, for those kind enough to read this far I’d like to give you the upshot. Once we accept that the recession can’t be as simple as “we overspent our credit cards and are now feeling the pain” we can better analyze solutions without prejudice. We can consider the possibilities of stimulus spending or monetary expansion without the off the cuff reaction that you can’t cure overspending with more spending. Something deeper is at work here and perhaps there is a role for stimulus or monetary expansion.
There are still arguments to be had and the cases of structural frictions and the type of negative incentives that Casey Mulligan bring up. However,