Joseph Stiglitz on Recalculation
First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services.
The problem is analogous to that which arose at the beginning of the twentieth century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers. With a decline in farm income in excess of 50% from 1929 to 1932, one might have anticipated massive migration. But workers were “trapped” in the rural sector: they didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.
He is almost on the same page as I am. On the 1920s and 1930s, I agree that the productivity increase in agriculture was a big factor. Sharecroppers and farm hands were displaced by tractors.* However, I think you can just call this a structural adjustment problem without having to invoke the theory of aggregate demand.
(*I had not thought of these folks as “trapped.” I was under the impression that, at least physically, they migrated a lot. But maybe I took The Grapes of Wrath and other stories of the era too seriously. It could be that the larger migration took place after the second World War (think of African-Americans moving to northern cities, for example). In fact, the war itself might have promoted a lot of migration.)
But the economy was very sick before the crisis; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand.
I wish he would elaborate on this. Is he saying that there has been a shortfall in aggregate demand for ten years? A lot of mainstream economic theory says that this cannot happen. Given enough time (and ten years is surely enough time, no?), the aggregate price level adjusts to equate aggregate supply and demand. Maybe he wants to say that there has been a sequence of adverse shocks to aggregate demand.
I guess I would say that the longer you extend the time frame of the economic distress, the more inclined I would be to describe it as a structural problem. That is where I come out.