Problems and The Problem

I wanted to revise and expand on something Paul Krugman said yesterday, namely that “there is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand.”

A lot of well-meaning and intelligent people find that view baffling, and I think it’s because they don’t fully understand what the phrase means. Does Krugman really think America has no economic problems besides inadequate demand? What about … X? What about Y? That’s how you end up with Tyler Cowen arguing that Total Factor Productivity growth has been slow for several decades and David Brooks observing that “The rate of new business start-ups was declining even before the 2008 financial crisis.” Understood properly, it’s perfectly easy to align these views. The way it goes is that in 2007 the American economy had some problems but it wasn’t suffering from mass unemployment. Now, four years later, we continue to have many problems that aren’t inadequate demand but the specific problem of mass unemployment is the result of inadequate demand.

The difference is, I think, pretty easy to see if you just think about foreign countries. Chile currently has an unemployment rate that’s lower than the United States of America’s. But Chile is also a poorer country. So one question you might want to ask is why isn’t Chile more like the United States? But another question you might want to ask is why isn’t the United States more like Chile? I have no particular insight into Chilean economic policy, but when we talk about how Chile might close the gap with the USA we’re talking about the deep issues of long-term growth. And even though the United States is already very rich, asking these sames questions about the USA is a valid undertaking. But that still leaves us with the question of why America can’t close the unemployment gap with Chile. The answer here can’t be that we need to do things that make us richer. Preventing mass unemployment just isn’t the same thing as creating long-term prosperity. China is poorer than Chile and has even less unemployment. Getting rich is about improving your potential output and on this score USA > Chile > China. Unemployment is about actually employing your resources to produce something instead of nothing, and on this score China > Chile > USA.

Brooks writes that “companies are finding that they can get by with fewer workers” and notes that President Obama himself “has observed” that “factories that used to employ 1,000 workers can now be even more productive with less than 100.” Unfortunately, both Brooks and Obama seem confused about the implications of this. If Apple developed a way to produce iPads twice as fast they wouldn’t “get by” with half as many factories, they would build and sell more iPads. That’s because demand for iPads is high. If your country’s output-per-worker increases that should mean more output. If instead you find yourself with fewer workers, that’s the very meaning of inadequate aggregade demand.