At least I think that’s what Raghuram Rajan is saying:
In fact, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side. For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.
Rather than attempting to return to their artificially inflated gdp numbers from before the crisis, governments need to address the underlying flaws in their economies.
So it’s 50% demand shortfall. Given that NGDP growth since mid-2008 has been the lowest since Herbert Hoover was president, I’d say it’s more like 70% demand-side, at least in the US. But let’s put that issue aside. I agree with Rajan that we have a huge demand-side problem. The question is what to do about it. Rajan seems to be saying “nothing.”
1. No one I know is claiming that we should target the pre-2008 RGDP trend line.
2. If borrowing is the problem, leisure (i.e. unemployment) isn’t the solution. Rather we need to work harder in sectors determined by market forces, not governments.
3. Elsewhere Rajan focuses on how attempts to reflate spending might lead to wasteful projects. That argument may apply to fiscal stimulus, but I can’t see how it would apply to monetary stimulus aimed at boosting NGDP, which did not involve buying unconventional assets.
I’m not as negative on this piece as some on the left. I agree that recessions are great times to do long term structural reforms. But millions are needlessly unemployed right now due to the demand shortfall that both Rajan and I think is massive. Why leave them hanging while we are going about our structural reforms? I read the entire essay and could find no persuasive answer to that question.
PS. I also find it interesting that Tyler Cowen says we need some additional monetary stimulus, but keeps raving about essays that take the opposite position. In one sense that reflects well on him, he is well known for having the unusual ability to look past things that annoy him and find gems of wisdom in papers that may also be highly flawed. But I’m not going to let him off the hook on this one:
Every paragraph of his piece is excellent,”
Does that include the paragraphs where he argues against monetary stimulus, despite the demand shortfall?
PPS. There are times where Rajan seems to equate easy money and easy credit. And he teaches at the school that Milton Friedman made famous!