What A "Guide to Discontinuity/ZMP for Skeptics" Should Look Like
The main evidence that I cite against the AD/AS story is the length of
unemployment spells and the large number of workers who are not going
to return to jobs in their previous industry, much less their previous
employer. At some point, even the 99 weeks of unemployment benefits is
not sufficient to explain long-term (approaching permanent)
If Arnold wants skeptics (like me) to take PSST seriously, he’s going to have to try a lot harder. As a skeptic, I immediately wonder:
1. Why can’t AD/AS explain long unemployment spells? This fits perfectly with an Akerlof-Dickens-Perry story where a long-run inflation/unemployment trade-off emerges at low inflation rates.
2. Why can’t AD/AS explain industry shifts? There are always struggling industries. During a recession, you’d expect whatever industries were struggling during the boom to suffer even more. What theory doesn’t predict this?
3. Why can’t 99 weeks of unemployment benefits aggravate nominal rigidities enough to explain the slow recovery? Free money doesn’t just hurt the incentives of the unemployed to search for/settle for a new job. It also hurts the incentives of employers to cut wages of existing employees.
4. What about my health insurance fairness story as a supplement to the standard wage fairness story?
5. Perhaps most importantly, skeptics want careful quantitative comparisons between (a) past recessions and today’s, and (b) quick-to-recover economies and ours. How do the length of spells and industry shifts today compare to those of the Reagan recession? The Great Depression? Why would entrepreneurial adaptation to technological innovation be so much smoother in e.g. Sweden and Australia than the U.S.?
A solid “Guide to Discontinuity/ZMP for Skeptics” would anticipate and answer all of these questions – and many more. With all due respect to Arnold, I don’t see that he’s even trying to do this.
I often take contrarian positions. Emotionally, I’m on Arnold’s side here. But when you play the contrarian, you can’t expect skeptics to do your legwork for you.