Demand Shock Autopsy

A wide range of economists have said that employment is low right now because of a lack of demand. As you might guess from the title of this blog, I think supply is more important.

Let’s look at two industries where I agree that lack of demand is dominant: manufacturing and residential building.

In my view, people spend less as a CONSEQUENCE of problems of supply — they recognize that their incomes will be low so that spend less especially on durable goods like cars. While the entire economy suffers from a lack of supply, specific industries like manufacturing are disproportionately affected, so to them the recession is in fact largely a lack of demand.

I also agree with the consensus that, in hindsight, there was too much housing in 2006, so demand for residential building has crashed since then.

A lack of demand will reduce relative prices in the affected industries. A lack of demand will reduce output and factor usage in about the same proportion. In fact, that’s what we see in manufacturing and construction. If anything, labor usage in those industries fell less relative to trend than output did.

If all industries suffered from a lack of demand, we would see economy-wide labor usage and output falling in about the same proportion.

But you cannot draw the same charts for the economy as a whole, because output and aggregate spending fell much less than labor usage did. Yes, construction, manufacturing, and some other industries suffer from a lack of demand. But problems with the labor market are the primary reason why employment has fallen economy-wide.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

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