Evan Soltas
May 1, 2012

Structurally Flawed Argument

Why the "structural economic problems" argument is incoherent and backfires

"The greatest challenge in the economy today is balancing our short-run need for the economy to recover against our great long-run structural problems X, Y, and Z."

There is only one correct response to such an argument: No. That is wrong. The argument that there is necessarily a trade-off between recovery in the short-run and addressing structural problems in the long-run is incorrect.

In fact, this sort of argument is a textbook fallacy known as false dichotomy: saying that we must choose between A and B, and since we cannot afford B, then of course we must choose A. The fallacy arises when the reason for the trade-off is not explained and is assumed, because that assumption ignores the possibility that the two objectives are complementary.

And indeed they are. I'm glad that Krugman's Very Serious People have finally learned what a trade-off is, but their application of it to our current economic circumstances is thoughtless and reeks of false intellectualism.

Their argument goes something like this: (1) establish [falsely] a long-run–short-run tradeoff, (2) assert that long-run problems X, Y, and Z, if untended, will be ruinous, (3) therefore determine we must scale back our short-run accommodation. It is so effective because the fallacy can nearly pass for thoughtfulness—when in reality the trade-off is too often a flimsy pretext for ignoring the short run and dealing with whatever that pundit's "hobbyhorse boogeyman" happens to be.

I'm not saying there is no such thing as a trade-off, or that the United States does not have structural economic problems. And there are certainly ways to address short-run economic problems, including our current need for recovery, in ways that create or worsen long-run economic problems. But the trade-off is unnecessary.

In fact, the two objectives—restoring growth today and tackling structural problems tomorrow—are complementary, because a sound recovery today would dramatically reduce the scale of many of our supposedly structural problems, or increase our capacity to address such problems.

Consider the fiscal deficit and public debt as an example. It is, in fact, one of the most common structural problems invoked in such arguments. Although the federal government has a structural budget deficit—i.e. one which is independent of cyclical swings—much of the budget deficit today comes from the weak economy, which pushes up our spending needs on unemployment benefits and welfare programs while pushing down revenue coming from the income, corporate, and payroll taxes.

The solution is quite simple. Monetary policy is meant to stabilize aggregate demand, so have it do that. (I recommend that Congress pass a law telling the Federal Reserve to target NGDP.) Then there is no trade-off between short-run fiscal policy and long-run fiscal policy, and then obviously you pick the optimal fiscal policy path. Since growth will be restored, the cyclical fiscal deficit will shrink, you can cut government spending without the existence of our trade-off, and without the legitimate concerns about the humanitarian costs of cuts in government spending when the economy is in recession.

Indeed, their argument should actually be our argument. The existence of structural problems does not reduce the case for immediate policy action. It makes that case ever more urgent. When the short run affects the long run—when addressing short-run problems makes addressing long-run problems easier, or reduces the size of such problems—then not only does a trade-off not exist, but the "low-hanging fruit" first step to resolving a long-run problem is actually fixing the short-run problem.

Consider the possibility that the recession has induced hysteresis—our structural unemployment rate may have risen and may be rising, and the past and present shortage of investment has reduced and is reducing long-run growth in output and living standards. The correct response is not to sit on our hands. It is to take action. The way to prevent further increases in the rate of structural unemployment is to address cyclical unemployment before it becomes structural. The way to address a shortage of investment is to stimulate investment now, to create the conditions—predictable growth in aggregate demand—which encourage investment today. And the best way to do both of these is through monetary policy channels.

The next time someone invokes long-run structural problems as a reason to ignore or scale back our response to short-run problems, throw the book at them. Tell them why their argument is the quintessential "false dichotomy" fallacy, that the trade-off between long-run and short-run is here unnecessary, that fixing the short run is complementary to fixing the long run, and that the fact that the short run affects the long run is an argument for, and not against, addressing short-run problems. Or, of course, you could just send them here.