On the Austro-Keynesian Exercise

by Reihan Salam

Matt Yglesias is thinking through job losses by sector:


One is to underscore the oddness of Naryan Kocherlakota’s observation that “the Fed does not have a means to transform construction workers into manufacturing workers.” It’s true, they don’t. But the biggest source of job losses is that we’ve transformed manufacturing workers into unemployed people, and the Fed really should have a means to transform the vast majority of unemployed manufacturing workers into employed manufacturing workers.

And this is how it looks across the board. You do have a big hit to finance and a bigger hit to construction, but the combined finance & construction share of the job losses is less than 50 percent. The manufacturing, retail, administration, leisure & hospitality, professional services, and transportation sectors all went down when aggregate spending went down and have recovered weakly as aggregate demand recovered weakly.

Bracketing the broader question, I’d want to know more about the manufacturing job losses. If we imagine that deleveraging will prompt broader shifts in consumption patterns, e.g., a shift away from manufactured goods like domestic SUVs towards the use of sharing platforms like Zipcar or the purchase of lighter, more fuel-efficient, often-imported automobiles, might incline domestic manufacturing firms towards being very wary of taking on more staff. The strategy of shedding workers and raising productivity levels would make more sense, even if there were a medium-term effort to raise consumption through targeted tax credits, etc. 

Labor-intensive manufacturing seems particularly vulnerable to the kind of technological alternatives on offer, and a step-change like a deep recession followed by a sluggish non-recovery will presumably lead firms to be particularly aggressive about embracing those alternatives to better their competitive position. One is reminded of the the emergence of GM’s success relative to Ford during the Great Depression, as described in Accelerating Out of the Great Recession.

This isn’t to say that the Kocherlakota framework is right. But it’s not obvious that heavy job losses in manufacturing don’t lend credence to it. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.