Monday, January 23, 2006

Dr. Jones: Post-Katrina Job Gains and 'Creative Destruction'

As I told my students in the days after Katrina--actually, even back at the beginning of this semester--the U.S. economy has much better 'shock absorbers' than it used to. As Greenspan likes to say, our economy is very "flexible" compared to our own past, and compared to other rich countries in the world.

There are a lot of high-tech reasons why: Computer programs that can tell Fed-Ex and UPS how to reroute packages when a hurricane knocks out an airport come to mind. But our flexible labor market, where it's fairly easy (and legal) to hire and fire, seems to make a huge difference.

So, when the hurricane shocks hit this year, many prophesied gloom and doom for the American economy--they seemed like the kind of shocks that, to a reasonble person, would hurt the "aggregate demand" for goods and services (except for construction goods and services), and might set of a self-fulfilling prophecy of fear leading to unemployment leading to more fear leading to more unemployment until the butterfly in the Amazon destroyed the entire earth.

But what really happened? As this CNN article shows, the shock absorbers kicked in, we had a couple of months of weak job creation, and now we're back to normal (actually, above normal) job gains.

The doom-and-gloomers got it wrong--the vulgar Keynesian story was (again) way off the mark, and the Greenspan view--that we are flexible enough to handle amazingly large shocks with few side effects--got another piece of evidence in its favor. The labor market absorbed Katrina's bad news and got right back to creating a couple of hundred thousand new jobs a month--while barely batting an eyelash.....

As an old WSJ op-ed said, 'Welcome to the neoclassical economy.' There's room here for a modest (New) Keynesian piece to the puzzle, but the bulk of the story seems to be Schumpeter's creative destruction plus Solow's steady accumulation of capital, labor, and technology. But there's no room at the inn for those who think the U.S. economy is just a house of cards....

ORIG. Posted by Garett Jones at 12/02/2005 12:26:00 PM


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