South By North Strategies, Ltd.

Fed Watch looks at the arguments claiming that the high unemployment rate is the result of structural factors and finds them wanting.

… While not discounting the probability that some structural factors are at play, the primary challenge facing the US economy is insufficient demand.  Optimally, I think the best solution to this challenge is that demand emerges from the external sector – and here I mean NET exports, export and import competing industries.  This source of demand would support needed structural change, ultimately for the good of the US and global economies.  This adjustment requires a relatively complicated expenditure-switching story on a global basis.  I don’t know how to avoid such a story.  Barring this outcome, one falls back on fiscal policy, which can surely do the job, but risks maintaining the current pattern of global imbalances.  And perhaps such concerns are overblown; after all, so far the fears of a Dollar/current account crisis have not emerged….
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In the end, I take something of a middle road.  I don’t think we need sudden withdrawal of fiscal stimulus, although that appears to be what is happening.  More appropriate would be near term expansion of fiscal stimulus sufficient at least to support the social safety net while allowing for an expenditure-switching story to build.  But perhaps there are just too many moving pieces in such a plan to allow it to actually come to fruition.  My fallback then is that we should not allow the reality of economic pain to take precedence over only imagined externally generated crisis.