Getting to Recovery
I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some alternative activity. In my mind, it is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative, equally productive enterprise. More fundamentally, I have suggested that our present situation is as if someone had quite successfully sabotaged the basic functionality of our financial system. Until we once again have a financial sector that can successfully allocate credit to worthy projects, we’re not possibly going to be able to produce as much in the way or real goods and services, no matter what the level of aggregate demand or stimulus package might be.
I agree with the point about technological frictions. I think the friction is worse now than it was fifty years ago, because the labor force has more advanced and specialized skills.
I disagree with his take on the financial sector. I am ready to throw the banks under the bus. My view is that the key to recovery is profitability in the nonfinancial sector. If firms are losing money, it’s crazy to lend to them. Firms that are barely profitable don’t want to borrow. So I would not be trying to prop up banks and push them to lend. That’s not what is going to get us out of this mess. But more economists agree with Hamilton than agree with me. I am the outlier here.