The Gaps in the Generality

Facts about recessions and unemployment (and matching)

Professor Cowen raises an interesting point in this recent Marginal Revolution blog post. If micro-data on unemployment recovery really is typically better explained by the supply-side of employment (I’d need to read more in that area to feel more confident myself), is the periodic case for dramatic efforts toward demand-side stimulus for (some) firms after a recession made decisively weaker by this? I also have to wonder if this conclusion highlights again the “elephant in the room” of political incentives for massive expenditures, especially lately, not seeming to exhibit much alignment with what is worthwhile (or at the very least not near any definition of optimal that I’ve come across) as a whole for economic health.

I’d also be curious to know how the general view that, “Economic policy should focus on preventing recessions rather than trying to ameliorate their effects,” accommodates policy proposals that could appear to have a goal of, let’s say, “ameliorating risks of intensity of recession” without necessarily functioning to prevent one.

An example derived from hindsight might be if steps had been taken prior to 2007 to prevent GSEs like Fannie Mae and Freddie Mac from promoting poor underwriting and collateral appraisal, inventing low-quality loan products which spread through finance, accumulating and lying about possessing $2 trillion in sub-prime loans (claiming less than 10% of what they actually had) according to the SEC, icing the cake by purchasing $438 billion in securities backed by sub-prime loans… etc. Though many disagree strongly with the notion that the GSEs were primary causes of the late 2000s crisis and recession (instead placing blame on Wall Street falling in love with CDOs or the abject failure of credit rating agencies to signal risk accurately, for example), it seems difficult to deny that actions to prevent perverse GSE incentives and potentially shrink or avoid the ultimate accumulation of sub-prime mortgages and derivatives dramatically before the crash would have mitigated the scope of the disaster. Long-winded, but that is the best example I could think of in which I would question the specificity of this particular attitude towards recessions in practice. That said, the view as so generally quoted is more of a summary than anything, and I’m confident a more nuanced consideration of some sort is available.

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