Image: Countries in Recession as of 2009. Red indicates countries officially or unofficially in recession.
There is a booming cottage industry among neoclassical economists to explain the Great Recession and unprecedented lagging US economic recovery as simply a function of the business cycle. The view is that this is just a deep down cycle and if we are patient all will be well. They believe this of course because the very nature of neoclassical economics cannot acknowledge structural change in economies.
The latest addition to this group-think comes from neoclassical economists Edward P. Lazear and James R. Spletzer in a non-peer reviewed article in the NBER Journal titled The United States Labor Market: Status Quo or A New Normal?. They argue that “[T]he current recession does not appear fundamentally different from prior ones, except that it is worse.”
And their logic behind such a claim? They claim that the relative decline in U.S. manufacturing jobs has been under way for a half century. Wow, this is truly stunning. U.S. manufacturing employment declined by just 2 percent in the 1990s, but as ITIF has pointed out, it fell by one-third in the 2000s, a rate of loss worse than the Great Depression and likely the second worst fall in manufacturing of any economy in history. But since neoclassical economists think that potato chips equal computer chips and car production is the same as car rental, they can blithely ignore this massive hit to the U.S. economy. If any state were to lose one third of its manufacturing jobs it would be in recession. But somehow, neoclassical economists can live in a textbook world where massive job losses due to structural economic decline don’t matter.
As we point out in our book Innovation Economics: the Race for Global Advantage, the housing bubble, Great Recession, and anemic recovery are all directly related to our loss of global competitiveness. Unless neoclassical economists recognize this reality they will continue to prescribe that the patient just get plenty and rest and drink fluids, rather than prescribe the surgery that is really needed.