In Melbourne last night Nobel Laureate Dale Mortensen gave a talk “After the Great Recession: Recovery or Stagnation”. After discussing his flow model of unemployment which essentially links levels of employment to numbers of job offers he moved to more familiar grounds. Mortensen argued that job mismatches (unemployed construction workers trying to get jobs in finance) accounted for at most 1.5% of US unemployment. The remaining excessively high levels of unemployment (of around 4 per cent) reflected deficient demand by those consumers with high debt – the 11 million Americans with mortgages “under water” for example. There is empirical evidence on this by Sufi et al who estimate that 65% of jobs lost in the US are due to deficient demand. The solution – guess what? Yes get the public sector to increase its spending to compensate for deficient private spending – a position that, in fact, most of the economics profession endorse. Mortensen sees this outcome as unlikely given the impact of Republican stupidity on US politics. Overall he is pessimistic – a fairly long-term stagnation of the US economy driven by wrong-thinking austerity ideologues and the severe crisis in Europe which further deflates the demand for US goods and services.
Debt problems? For sure there are but deal with them without inducing worse deficits now through a consequence of resource underutilization that will in fact worsen longer-term debt problems not reduce them. It is a standard story I have long believed.
An interesting and obviously well-informed talk though one whose conclusions did not surprise me in the least. I notice that this morning the IMF are warning the US against cutting the deficit too quickly. Mortensen is pessimistic about the US economic future because he believes it will not pay heed to such well-informed and reasonable warnings.