A Bet on PSST vs. AS-AD?
By Arnold Kling
Karl Smith is interested in some sort of bet.
I, however, will predict that the US will achieve an average 5% real growth [rate] over a sustained period [of] say 12 quarters [or] more starting within five years.
Tim Pawlenty will see Karl and raise him.
Meanwhile, I believe that real GDP is trend-reverting, and it is hard to see how it gets back to trend without a period of strong economic growth, so I think I am more inclined to bet with Karl than against him.
From the perspective of PSST vs. AD, an interesting bet would focus on the structure of employment post-recovery vs. pre-recession. So let’s say that we get back to something like full employment in 2015 (the middle of President Palin’s first term). My guess is that the proportion of people holding jobs in 2015 that are similar to those they held in 2007 will be much less than, say, the proportion of people holding jobs in 1999 that was similar to those they held in 1991. That’s a harder bet to construct, but I think it more clearly differentiates AS-AD from PSST. I want to suggest that the current recession is due to a severe disruption of patterns of trade, and as a result we will see a more dramatic change in the job structure now than we did during a more tranquil period.