Counterparties: Economists’ false choice

May 8, 2012

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

Should the government speed up the pace of the economic recovery in the short term? Economists have a way of making simple questions quite complicated.

The current debate among a handful of top economists centers on whether the problem with Western economies is cyclical – the result of the economy’s normal ups and downs – or more structural. Ezra Klein calls this divide “Larry Summers vs. the long-termers.” The latter camp includes Raghuram Rajan, who’s out with a new piece in Foreign Affairs. To Rajan, the crisis is a “wake-up call” on our high levels of personal and public debt. The only way to fully reverse a decades-long slump in middle-class incomes, he says, is through longer-term solutions like worker retraining and education reform. In the short term, this effectively means some degree of continued suffering for the unemployed.

One problem with this, to Summers, Krugman and others in the cyclical camp, is that cyclical unemployment quickly becomes structural. Adjusting for demographic trends, Brad DeLong looks over April’s 342,000 labor force dropouts and comes to a depressing conclusion:

…that is a gap of 0.7%-1.1% points of the adult population: people who really ought to be in the labor force right now, but who are not. Are they now part of the “structurally” non-employed who we will never see back at work, barring a high-pressure economy of a kind we see at most once in a generation? Probably.

Looking at the Beveridge Curve, David Kotok finds more reasons to believe in the structural unemployment story. Laura Tyson isn’t as convinced, but worries that technology is making our labor problems worse.

But the structural vs. cyclical debate may not be a binary choice. Klein, like the IMF, suggests things like spending and worker retraining could be immediate and budget cuts could be phased in as the economy recovers. “If ever there was a false choice, this is it,” as Jared Bernstein puts it. – Ryan McCarthy

On to today’s links.

“Billion-dollar” traders are quitting Wall Street’s biggest banks – Bloomberg

Financial Arcana
The frightening “sub-priming” of commodities – FT Alphaville

Financial advisers are scrambling to get their clients into Facebook’s IPO – or something like it – WSJ
Facebook’s Zuckerberg takes just five questions at kickoff for Facebook’s $10 billion IPO – Reuters
Facebook Funds: The Biggest Scam Running – Reformed Broker
What Mark Zuckerberg’s hoodie really means for Facebook’s IPO – CNBC

In the wake of the mortgage collapse, rents are hitting historic highs – LAT

Invisible Hand, meet Greased Palm – The world gets tough on bribery – New Yorker
The lobbying push to weaken the FCPA is now officially dead – Corporate Crime Reporter

Old Normal
How the industrial revolution and a group of entrepreneurs saved the British penny – Bloomberg

Visual Silence
A plug-in that takes all those pesky words off the Internet – Cool Hunting

EU Mess
A reminder that spending cuts are only half of the austerity equation – Marginal Revolution

It’s About Time
Bank of America begins its principal reduction program – Bank of America

Primary Sources
Credit card comeback: Consumer revolving credit increased 7.8% in March – The Fed

The Ryan budget’s war on data collection – Econ Browser

New Normal
The number of master’s degree holders and PhDs receiving food stamps has almost tripled since 2007 – Chronicle of Higher Education

The Atlantic‘s new business site is called “Quartz” – Quartz

Crisis Retro
Taxpayers may make a $15 billion profit on the AIG bailout, GAO projects – Reuters


Comments are closed.