Via Cowen’s law someone has already modeled this, but a simplistic answer to the Hysteresis puzzle this:
Declines in AD –> Declines in durable and housing purchasing –> Suboptimal House Production Arrangements [Too Labor Intensive]
Release of AD constraint –> Market Labor Demand must compete against Household production that is labor heavy –> Total [Market + Household]Demand for labor is higher than if no AD shock –> Inflation occurs at higher levels of unemployment.
The real life analogs:
- “How am I supposed to take this job 30 miles away when we only have one car”
- “Now we can finally get married and get a place of our own”
- “No one has opened a daycare here in 5 years. I don’t know how we’ll take all these kids”
I want to do a big breakout of the Pew Youth survey but I think the big message is that the Great Recession was an example of “Growth, Interrupted” that is young people en mass simply failed to take on the trappings of adult life.
If they all try to at once, there is not enough household capital to support them.
Its also worth pointing out that the Great Depression/WWII was followed by a baby boom. A literal bounce back from “Growth, Interrupted.”
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Tuesday ~ February 21st, 2012 at 1:20 am
Lord
But will it take a decade to do that? A decade and a half? Another world war?
Tuesday ~ February 21st, 2012 at 12:33 pm
Becky Hargrove
At the very least, it is not as easy for nations to do full scale war in the present, saddled as they are with the obligations of services.