Larry Summers vs. PSST
By Arnold Kling
He gives us a double whammy. He writes in the Financial Times,
That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident, as shown by three points: the propensity of workers to quit jobs and the level of job openings are at near-record low; rises in non-employment have taken place among all demographic groups; rising rates of profit and falling rates of wage growth suggest employers, not workers, have the power in almost every market.
He writes in the Washington Post,
Pressure on private spending is enhanced by structural changes. The publishing industry provides a vivid example. As local bookstores have given way to megastores, megastores have given way to Internet retailers and Internet retailers have given way to ebooks, two things have happened. The economy’s productive potential has increased and its ability to generate demand has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend.
Obviously, Summers is using the AS-AD paradigm and not the PSST paradigm. In the first quote, all it takes to convince Summers that we have a demand problem is the fact that the unemployed are willing to work. The PSST paradigm would say that the problem is that we have not established patterns of sustainable specialization and trade in which those workers have high marginal revenue product. The industries in which they are to work have yet to be discovered.
In the second quote, Summers recognizes that structural change is taking place. However, he sees it as a problem with aggregate demand. Incomes are being shifted to people who spend less.
In the AS-AD framework, the solution is simple. Raise aggregate demand. In the PSST framework, it is not so simple. The challenge is for entrepreneurs to discover new industries, and for workers to adapt.