Casey Mulligan on employment

Saturday, July 4, 2009

I like the way that Casey Mulligan describes the employment picture:

"While GDP has hardly surprised me, I did not anticipate last fall that employment would get so low. Even with the benefit of hindsight, I am not sure I see a complete explanation."

Read his post here.

Rebecca Wilder


janie July 4, 2009 at 9:01 AM  

As others say, this is uncharted territory. Despite all the problems, I hope you have a good Independence Day! aj

Anonymous July 4, 2009 at 7:18 PM  

The reason that most economists continue to underestimate this downturn is because (a) the downturn is being driven by deleveraging from literally unprecedented levels of private debt, and (b) the neoclassical theory of economics, which dominates academic and market economics alike, ignores the role of private debt in the economy.

That is manifestly the case in America today. Under the stewardship of neoclassical economics in the personas of Alan Greenspan and Ben Bernanke, the growth in private debt has not merely been ignored but has actively been encouraged, in the dangerously naive belief that the private sector is being “rational” when it borrows.

This apparent indictment of the private sector as therefore “irrational” is in fact really an indictment of neoclassical economics for abuse of language. What neoclassical theory means by the word “rational” is “able to correctly anticipate the future”–which is the definition, not of rationality, but of prophecy.

Deleveraging is already extreme: the most recent flow of funds data shows that private debt is falling rapidly and therefore subtracting from aggregate demand rather than adding to it. As noted in earlier Debtwatch Reports, in the modern debt-dependent economy, changes in the demand financed by changes in private debt are strongly negatively correlated with the unemployment: when debt’s contribution to demand falls, unemployment rises.

... the crisis is being driven by deleveraging, and neoclassical economists do not even include private debt in their models.

...there is a very strong link between the rate of growth of debt and unemployment: when debt grows more quickly, unemployment falls; when debt grows slowly or falls, unemployment rises

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