Noah has been thinking about Patterns of Sustainable Specialization and Trade, and makes some observations that have also struck me as important
This opens the door for a hugely expanded role for government (or other large, centralized actors) in the macroeconomy. If global patterns matter as much as local prices, then an actor large enough to perceive and affect the overall pattern might be capable of nudging the economy out of a bad equilibrium and into a better one. Dani Rodrik has been saying this for a long time in connection with newly developing economies, but the same may be true in rich countries when faced with disruptive technological change or globalization.
Is it possible that fiscal policy is really just industrial policy? Could it be that World War 2 ended the Depression not because it represented a sufficiently large Keynesian stimulus, but because it deliberately created new industries and new technologies that formed the basis of a new sustainable pattern of specialization and trade? After all, the modern U.S., German, and Japanese automobile and aircraft industries look suspiciously like the same firms that supplied their countries’ war efforts seventy years ago. And Annalee Saxenian will tell you that Silicon Valley got its start from World War 2 weapons research and shipbuilding.
Government policy is an interesting handle on it. More consistent with my interest is the role of the financial sector.
We know that the financial sector is making huge claims on US and to some extent global output. How are they managing this.
The uneasy consensus from Tyler Cowen to Mark Thoma, seems to be that they are more or less stealing it.
That just doesn’t sit well with me. However, the notion that there are massive returns to industrial policy because of network externalities and that the global financial sector is largely involved in private for-profit industrial policy makes more sense as a baseline.
There is obviously much more to be thought and said, but this seems like it could be going somewhere.