The Good Times Might Never Come

In a BBC interview last week Paul Krugman said: “a full employment economy is by far the best environment in which to make structural adjustment; you can see that historically”.

It’s a claim that fails the tests of theory and evidence.

In the lexicon of international organizations the term structural adjustment describes a mix of regulatory and economic reforms intended to restore the sustainability of market-oriented economic growth after onset of crisis. Adjustment includes measures to restore balance of payments, promote exports, macroeconomic stabilization, public debt and budget deficit reduction, elimination of wage and price distortions, privatization, and the relevant institutional reforms of law and regulation (the sequence is disputed).

I want to discuss the reasons for the flaw in the implied ideal Krugman sequence: Economic recovery (or just jobs) first, structural adjustment second. Countries can and should delay difficult reforms at least until exit from crisis is well underway.