Coming to Grips With the End of Debt-Fueled Consumption

(MoneyWatch)  Brad, I was intrigued by your blog post on your own site describing our exchange. It read as follows:

Tyler worries that the U.S. economy faces deep problems of structural adjustment. I think that deep problems of structural adjustment melt away to normal annoyances whenever aggregate demand is high -- that they appear to be insurmountable and painful difficulties only when aggregate demand is low.

In my view the sectoral shift we are having is, most of all, away from debt-financed consumption. (This is clear in the automobile sector, among other places, but of course construction too. See, for instance, the CBO's projected housing-starts data.) In other words, the real sector of the economy is adjusting to the fact that aggregate demand cannot always be high and rising. It's not just that declines in some prices are needed but rather many key sectors are shrinking and in due time others will be growing.

Maybe it is fair to say that these problems would "melt away" if aggregate demand were high, but I find that neither a consolation nor an argument against the sectoral-shifts view. The fact that aggregate demand must contract is a big part of what is driving the sectoral shifts and we don't want to recreate the previous allocation of resources. The key to recovery is to get these unemployed resources into new and profitable uses and that means successful entrepreneurship. Government fiscal policy, at best, can provide a stabilizing bridge from one state of affairs to another.

It cannot eliminate the need for the very painful adjustments to take place.

Follow Blog War over the federal stimulus package:

• Monday, April 6, Brad DeLong: The Stimulus Package: Like the Housing Bubble, Only Better
• Monday, April 6, Tyler Cowen: Good Policy, Bad Timing: How the Stimulus Package Could be Smarter
• Tuesday, April 7: Tyler Cowen: Stimulus Won't Help U.S. Industry Restructure Itself
• Tuesday, April 7: Brad DeLong: Arguments Against Fiscal Stimulus Exhibit a "Deep Incoherence"
• Tuesday, April 7: Tyler Cowen: It's Easier For the Government to Print Money Than to Spend It; Or, Monetarism Rulz!
• Tuesday, April 7: Brad DeLong: Fiscal Stimulus Beats Doing Nothing -- By a Lot
• Wednesday, April 8: Brad DeLong: Why the Geithner Plan is Good Medicine for the Banking System
• Wednesday, April 8: Tyler Cowen: The Geithner Plan: An End Run Around Congress
• Thursday, April 9: Tyler Cowen: Coming to Grips With the End of Debt-Fueled Consumption
• Thursday, April 9: Brad DeLong: Yes to Economic Restructuring; No to Universal Bankruptcy
• Friday, April 10: Brad DeLong: Final Thoughts: What Would Turn Me Against Fiscal Stimulus
• Friday, April 10: Tyler Cowen: The Economy is in Too Much Trouble for Stimulus to Help