Arnold Kling has written an excellent article countering the claim that the current economic crisis calls for the implementation of Keynesian economics.
“This back-to-Keynes movement,” Kling writes, “ignores the dramatic restructuring of our economy over the past 50 years.”
He points to three major changes:
1. The decline in manufacturing production workers as a percent of employment.
2. The increase in the proportion of the work force with at least some college education.
3. Proportion of unemployed not on temporary layoff, at peak during a recession.
Kling concludes:
The way I see it, the complexity of today’s economy means that old-fashioned Keynesian policies will not restore full employment. Pump-priming and stimulus policies are a good fit for a manufacturing economy with homogeneous labor affected by temporary layoffs. They are not such a good fit for a post-industrial economy with an educated labor force facing permanent structural changes.
Over the next ten years, some sectors of the economy on long-term downward trends will continue to shrink. Sectors that became bloated in recent years, notably mortgage finance, will eventually settle back to lower, sustainable levels. Much of the new strength in the economy will come from underlying long-term forces. New workers will be absorbed by businesses that have not yet been launched in industries that we have not even imagined. For this restructuring, what I like to call The Great Recalculation, Keynesian stimulus will be irrelevant.
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