I have a pet theory that one of the main reasons the policy response to the current economic crisis has been so bad is that we had the wrong crisis. Some people sat around looking at the US economy from 2002-2006 and thought all was well. But many people looked at it and could see clearly that all was not well. That we were on an unsustainable path and that we were primed for a crash. The main feature of the unsustainable path was huge inflows of foreign capital into AAA-rated American financial instruments, including US gvoernment debt, mortgage-backed securities, etc. These unsustainable flows were distorting employment patterns and sustaining unsustainable living standards. Americans were maintaining broad-based consumption growth only through excessive household indebtedness and underpayment of taxes relative to the quantity of services being received. Someday soon, the capital flows would come to an end and we’d have a version of a classic developing economy sudden stop of “hot money,” except it would be happening to a rich industrialized nation. The value of the dollar would crash, restraining inflation would require high interest rates, and the US economy would feature a period of painful restructuring.
There was no particular reason to believe that this crisis would lead to a prolonged period of mass unemployment since the dollar crash would facilitate exports (including tourism) and import-competing industries, but it would very possibly create a stubbord residual of long-term unemployed people. What’s more, it would be a prolonged crisis in American living standards. The good news, from the standpoint of the policy wonk, is that it would be a very intellectually interesting prolonged crisis in American living standards. It would require all kinds of fascinating big ideas to explain how this could have happened and how to chart the way forward. And precisely because lots of smart people foresaw the occurrence of that crisis, and because that crisis really seemed very likely, and since a crisis certainly did happen a diverse array of smart people have just sort of trundled along acting as if the crisis we’re facing is that crisis.
I think sections of Tyler Cowen’s The Great Stagnation are about the crisis we should have had, that Michael Spence’s The Next Convergence is largely about the crisis we should have had, Joe Stiglitz’ recent Vanity Fair article is basically about the crisis we should have had, Michael Mandel’s piece on the myth of American productivity is about the crisis we should have had. I can name others. There’s no particular ideological tendency grouping these people together, since if we were facing a big profound crisis then it would be the case that we need big profound answers that can support a range of different ideological positions. Indeed, I would say that an awful lot of the Obama agenda has been about efforts to address the crisis we should have had. That’s why long-term fiscal austerity is important and why there was no “holy crap the economy’s falling apart, let’s forget about comprehensive reform of the health, energy, and education sectors” moment back in 2009.
But this is not the crisis we’re having. Interest rates are low. Headlines tell us that “U.S. Factories Could Suffer From Dollar’s Appeal”. I’m inclined to think that we will, at some future point, face the crisis we should have had and it will need to be addressed in complicated ways. But the crisis we’re having is, for all its horror and scale, a pretty banal monetary crunch—the natural rate of interest is below zero, nomimal rates can’t go below zero, and the Fed won’t act to push real rates lower. Fixing that wouldn’t fix “all our problems” any more than ending the Great Depression solved all the problems of the America of its time (Jim Crow, anyone?) but it would solve the problem and it doesn’t require us to fix the other stuff first.