I think, perhaps, Raghuram Rajan has been partly misunderstood. In a much maligned essay he writes:

Since the growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly—or that doing so would be enough to get the global economy back on track. The status quo ante is not a good place to return to because bloated finance, residential construction, and government sectors need to shrink, and workers need to move to more productive work.

This has been interpreted by Karl and Paul Krugman to mean that the construction sector is currently in need of shrinking. What it looks to me like is that he’s saying we can’t go back to the size of these sectors that predominated before the recession, because it was in need of shrinking then. The key to interpreting correctly is that he says the way things were is not a “good place to return to“. But the confusing part is that “bloated finance, residential construction, and government sectors need to shrink“, rather than “needed to shrink”. But what I think he means here is that when sectors are bloated, as they were before the recession, they need to shrink. We do not want “to return to” the way they were because they were bloated, and “bloated..sectors need to shrink”.

The misunderstanding this generated is unsurprising: it’s worded confusingly. And who knows, maybe I’m the one reading him wrong. In any case, there much else wrong with his piece that, most importantly the incorrect assumption that we can either do long-term reforms or worry about short-term problems. We can do both. Why not, for instance, identify solutions that attack long-term and short-term problems. What magical policy could simultanously address our short-term housing sector weakness (including an oversupply of housing, low house prices keeping homeowners underwater, and a lack of normal construction sector contribution to recovery), long-term demographic problem driven by an aging society, a medium and long-run debt-to-GDP problem, and a shortage of skilled labor? A huge increase in skilled immigration.

To be clear: this is not to say we shouldn’t have more inflation, because we should. But whenever someone like Rajan wants to point out long-run problems, we should argue against them and advocate for more inflation, but we should also say that even if he’s right, there is at least one policy that address short and long-term problems: more immigration, and now. We might never convert the do-nothing caucus to inflationists, but perhaps we can convert them to the do-something-productive congress.

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