The Structural Revolution

The country is divided when different people take different sides in a debate. The country is really divided when different people are having entirely different debates. That’s what is happening on economic policy.  Many people on the left are having a one-sided debate about how to deal with cyclical downturn. Main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at a full speed, government should borrow and spend more. Federal government is now running deficits of about $1 trillion a year. Some of these cyclicalists believe the deficit should be about $1.4 trillion. (source: by David Brooks – NYTimes – 08/05/2012)

Cyclicalists rail against what they see as American austerity-mongers who resist new borrowing. They really rail against European ones: they see François Hollande’s victory in France as a sign that, in Europe at least, the pendulum might finally be swinging from austerity to growth. Other people, some on the left but mostly in the center and on the right, look at cyclicalists and shrug. It’s not that they are necessarily wrong to bash excessive austerity. They’re simply failing to address core issues. Diverse people in this camp, and I’m one of them, believe core problems are structural, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt. There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows. Then there are structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers. Then there is political sclerosis. Over the decades, companies and other entities have implanted a growing number of special-interest deals into the tax and regulatory codes, making it harder for politically unconnected, new competitors, making the economy less dynamic. These and other structural problems have retarded growth and wages for decades. Consumers tried to compensate by borrowing more. Politicians tried to compensate by reducing the tax bill, increasing deficit spending, ensuring easy credit for homebuyers and by helping workers shift out of the hypercompetitive, globalized part of the economy and into the less productive and more sheltered parts of the economy, mostly into health care, government and education. But you can only mask structural problems for so long. The whole thing has gone kablooey. The current model, in which we try to compensate for structural economic weakness with tax cuts and an unsustainable welfare state, simply cannot last. The old model is broken. The jig is up.

Unlike the cyclicalists, we structuralists do not believe that the level of government spending is the main factor in determining how fast an economy grows. If that were true, then Greece, Britain, France would have the best economies on earth. (The so-called European austerity is partly mythical). We believe that the creativity, skill and productivity of the work force matter most, and the openness of the system they inhabit. Running up huge deficits without fixing the underlying structure will not restore growth. As Raghuram Rajan of University of Chicago writes in the current issue of Foreign Affairs, “Since growth before the crisis was distorted in fundamental ways, it is hard to imagine that governments could restore demand quickly or that doing so would be enough to get the global economy back on track. Status quo ante is not a good place to return to because bloated finance, residential construction and government sectors need to shrink, workers need to move to more productive work”. Structuralists face a tension: How much should you reduce the pain the unemployed are feeling now, and how much should you devote your resources to long-term reform? There has to be balance. For my taste, Germans are a bit too willing to impose short-term pain on diverse national economies in Europe. But they are absolutely right to insist on sort of structural reforms they themselves passed in the 1990s. In United States, there are almost no politicians willing to embrace cyclicalist agenda, which would mean much larger deficits. Structuralists don’t have a perfect champion either. President Obama is too minimalist. He doesn’t seem to believe America’s structural problems are that big, making his reform ideas small. Mitt Romney and Representative Paul Ryan understand the size of the structural problems, but their reform plans are constrained by Republican Party’s single-minded devotion to tax cuts. Make no mistake, the old economic and welfare state model is unsustainable. The cyclicalists want to preserve the status quo, but structural change is coming. 

Acerca de ignaciocovelo
Consultor Internacional

2 Responses to The Structural Revolution

  1. Professor Uziel Nogueira says: As an economist of an international organization (IDB), I’ve noticed that reflective writings and pointed questions about the economy are made, quite often, by non economists. David’s piece is a proof of my observation. Congratulations David for the best op-ed column on economics I’ve read in the NYT ! David has the (correct) approach to understand the real NATURE of the problems affecting the US economy. As he aptly put it: ” The diverse people in this camp — and I’m one of them — believe the CORE problems are STRUCTURAL, not cyclical. The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.” The piece mentions three macro inter-connected structural problems: globalization and technological change; the decline in human capital and political sclerosis. Ad hoc actions are being taken on a piecemeal fashion to deal with some questions but a systemic approach is lacking. Why? Neither Obama nor Romney –and their respective political parties and intellectual think tank/academic support — are convinced that the US economic problem is structural in nature.

    Perhaps, the reason is not intellectual in nature but political. Political SCLEROSIS is one of the major structural problems that should be dealt with. The challenge is: which party or high profile politician will take up political reform as their campaign platform? Anyone?

  2. A few days ago, I read an authoritative-sounding paper in The American Economic Review, one of the leading journals in the field, arguing at length that the nation’s high unemployment rate had deep structural roots and wasn’t amenable to any quick solution. The author’s diagnosis was that the U.S. economy just wasn’t flexible enough to cope with rapid technological change. The paper was especially critical of programs like unemployment insurance, which it argued actually hurt workers because they reduced the incentive to adjust. O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States — though not yet at war itself —began a large military buildup, finally providing fiscal stimulus on a scale commensurate with the depth of the slump. And, in the two years after that article about the impossibility of rapid job creation was published, U.S. nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today. So now we’re in another depression, not as bad as the last one, but bad enough. And, once again, authoritative-sounding figures insist that our problems are “structural,” that they can’t be fixed quickly. We must focus on the long run, such people say, believing that they are being responsible. But the reality is that they’re being deeply irresponsible. What does it mean to say that we have a structural unemployment problem? The usual version involves the claim that American workers are stuck in the wrong industries or with the wrong skills. A widely cited recent article by Raghuram Rajan of the University of Chicago asserts that the problem is the need to move workers out of the “bloated” housing, finance and government sectors (…..)


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