The Book of Jobs | Joseph Stiglitz | Vanity Fair
Joseph Stiglitz writes in Vanity Fair regarding the recession. Many people draw parallels between the Great Depression and the current recession, but Stiglitz sees a different parallel. He rightly notes that monetary policy was unable to fix either the Depression or this recession. Instead,
At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.
What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.
Bad government policy in the financial and real estate markets led to the recession, but they actually disguised the bigger problem,
The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.
I am skeptical that America’s entry into World War II led to an end to the Depression: destroying resources in a war is an inefficient way of industrializing a society. I am skeptical that, in general, stimulating aggregate demand is the cure for recession. However, I agree with Stiglitz’s recommendations here:
The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one.
Modernity is not defined by being now, but by rapid technological change. In the past 100 years, our job market has changed from being one that was mostly agricultural to one that is mostly not. We can’t expect the monetary lever to be able to help our society maintain high employment and low interest as we undergo surprising and complex changes. Simply spending won’t fix things either. Smart stimulus is needed. I don’t mean doing shovel-ready work for a year or two; we need to help people learn how to do jobs that didn’t exist a few years ago.
