Structural Transformation, Deep Downturns, and Government Policy
Joseph E. Stiglitz
Most recessions are a result of some shock to the economic system,
typically amplified by financial accelerators, and leading to large
balance sheet effects of households and firms, which result in the
effects persisting. But, over time, the balance sheets get restored.
Even banks recover.
But
episodically, the “shock” is deeper. It is structural. Among advanced
countries, the movement from agricultural to manufacturing in the last
century, and the more recent movement from manufacturing to the service
sector reflect such a large economic transformation. The associated
downturns are longer lasting. The usual responses, in particular,
monetary policy, are only of limited efficacy. Policies have to be
designed to facilitate such transformations: markets on their own
typically do not do well.
This
paper explains why such transformations are associated with
persistently high unemployment, and describes the effects of particular
government policies. It looks at the lessons of the Great Depression
both for the advanced countries and the developing countries as they go
through their structural transformations.
You may purchase this paper on-line in .pdf format
from SSRN.com ($5) for electronic delivery.
