Arnold Kling writes about the future of macro, and this passage merits close reading:
I believe that confidence in generic fiscal policy is also misplaced. Superficially, it makes sense that government spending can replace private spending when the latter breaks down due to a crisis in the financial sector. However, the fiscal-stimulus theory fails to take into account the fact that what is going on in the real economy, particularly after a financial shock, is a reallocation of resources out of dying sectors and into emerging sectors. (emphasis added)
Instead of looking at fiscal stimulus, I think that economists should focus directly on the adjustment process, particularly in labor markets. How do new industries emerge to absorb the resources that are released from industries that collapse during a financial crisis? What sorts of policies can make this transition take place more quickly and with less difficulty? What labor market institutions are most conducive to economic recovery? Should government try to create policies that mitigate the cyclical behavior of income shares, so that profits rise less during a boom and fall less during a recession?
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