Karl Smith has had some great posts lately, both about Noah Smith and the cyclicalists/structuralist divide and about Rajan's Foreign Affairs article (I, II). I'm going to add my own thoughts on each topic here.
Noah Smith has a blog post arguing that cyclicalists should start talking about structural issues too. Using David Brooks' recent terms, he says "I do not mean that cyclicalists should stop recommending things like quantitative easing. I mean that they should start also throwing out ideas about how to improve our economic performance in the long run."
There's two issues here worth bringing up. The first is that Obama is in a ton of trouble, because all he's done in the past two years is talk about long-term problems (remember Winning the Future?) while dancing around the short-term unemployment crisis. His big achievement, health-care reform, wasn't about how in a rich, modern society like ours everyone has a right to health care. Instead it was explained as a way of "bending the cost curve." Bending the long-term cost curve is about as much of a "structuralist" way of pitching expanding health care as possible.
The second is that blurring these two items as an economic matter has been a major problem for both the Obama economics team and for a certain variety of centrist, deficit-hawks in their view of our economic situation. This is the "two deficits" problem. In this argument our short-term deficit isn't large enough, but our long-term deficit is too large. Fine as far as it goes. But in this theory, in order to fix the first you have to make progress on the second at the same time.
Maybe there are political reasons why this is the case, but the economic ones don't jump out. There are good short-term ideas and good long-term ideas. If they are each good ideas, why not do each on their own? Why do they have to move together? The explanation most give, as a Treasury official told Noam Scheiber, is that the government needs to show “some signal to US bondholders that it takes the deficit seriously” and that “spending more money now [on stimulus] could actually raise long-term [government] rates, thereby offsetting its stimulative effect.” I think this is dead wrong, and if Obama loses this argument will be one of the major reasons why. It is what kept him trying
to kick Lucy's football negoitate with Republicans in 2011. If both need to move, they throwing a roadblock in front of one stops the other - and given that Republicans won't budge on tax increases, it takes away the case for more stimulus in the short-term. Meanwhile interest rates continue to stay at record lows.
As for the Rajan piece in Foreign Affairs, I think there are two big problems with it beyond what Karl mentions ("the piece had little to do with the recession and nothing to do with borrowing and spending for recovery"). The first is the crux of his argument, which is that 2007 featured "artificially inflated GDP numbers." It is no doubt impressive to people who haven't thought about it hard to state that we had a GDP bubble in 2007 alongside a housing bubble. But what does that even mean? What else would be true about the world if US GDP was unsustainably high in 2007?
Jim Bullard made this argument recently and even then the justification for the argument switched completely within days, once it came under the critical scrunity of the econoblogosphere. In one version the case was about how the collapse of the housing bubble represents a technology loss. In the second argument it was pure wealth effect: we feel poorer, and the only solution is to beg policymakers to “please reinflate the bubble."
The second issue is that the manitude of numbers are completely off. Subprime mortgages were about refinancing, not about new home construction. As Karl Smith noted, to the extent subprime encouraged single-family home construction, it came at the expense of multi-family home construction. Residential building construction is off about 400,000 workers - even if those jobs are gone completely, we have 5 million more workers unemployed right now than we did in 2007 (12.5m versus 7.5m). I'd be happy to say that the NAIRU is up 400,000 people if we can end these so-called structural arguments here.
[Also: Rajan's GSE argument has been debunked in several places. It is hard to argue that Congress is pro-consumer-debt and pro-debtor/easy credit policies in the past 30 years when it passed the 2005 bankruptcy reform act. It is not controversial to argue that the 2005 bill was significantly harder on debtors looking to file bankruptcy. Instead of Congress, the major thing that changed the consumer debt markets came from the Supreme Court. In 1978's Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp, the Supreme Court interpreted the word “located” in the National Bank Act of 1863 as meaning the location of the business and not the location of the customer, which completely changed how credit cards would work in the following decades.
Also, the conservatives' publically-stated calculus is off. There is a sense in which there are short-term things we can do, or long-term things we can do, and we have limited time and energy, so better to focus on the long-term things. But there's reason to believe that conservatives are purposely ignoring the short-term things, because weak economies are the perfect time to be able to achieve their preferred long-term agenda ideas.
We know from the explanations for dissenting votes on the Federal Reserve that those dissenting from more demand now believe that this higher demand through monetary policy gets in the way of making "hard choices" on entitlements and tax reform. The Wall Street Journal has Federal Reserve Bank of Dallas President Richard Fisher saying “The more we offer accommodative monetary policy, the less incentive they have to pull their socks up and do what’s right for the American people.” (This is also currently going on in Europe.)
If you view the Great Society, the New Deal, and the whole regulatory/Keynesian/welfare state as a form of tyranny, well, destroying most forms of tryanny requires bloodshed. If a conservative revolution happens in the next Congress, and the only cost was 4 years of mass unemployment, wouldn't it be worth it to experience liberty in our lives? I fear this explanation drives more conservative commentary on economics than we realize.]