Since Brad DeLong has politiely noted my role in starting the use of the jigsaw puzzle metaphor in thinking about responses to the recession (though Don Boudreaux was the inspiration for its use in a broader context), I want to note the brief discussion that has ensued at his blog this morning and point out that the argument that expansionary fiscal policy is necessary to provide the required boost in aggregate demand to generate the recalculation process overlooks the ways in which fiscal policy interferes with the very recalculation process DeLong and others profess to be concerned about.
DeLong has a recent piece where he argues that recovery must indeed be "structural" and thus involve something akin to "recalculation," but that before structural recovery can take place, we need to have a demand recovery, hence the case for aggregate demand boosting policies alongside the necessary recalculation.
Tyler Cowen and Greg Ransom both noted the way in which this makes DeLong's argument quasi-Austrian. Over at DeLong's blog yersteday, DeLong referred to this claim as a "Department of Huh?" which is his way of implying that no Austrian would support his view, especially stabilizing AD. Tyler commented that not all Austrians would disagree with DeLong's concern about the necessity of stabilizing AD and recalculation. Daniel Kuehn then argued: "The controversial claim is that recalculation incited the downturn, and that is something that Brad (I think rightly) rejects."
As I pointed out in response, this is not the controversial claim. Austrians do not think that recalculation "caused" the downturn, rather that recalculation is a necessary component of the downturn/recovery process. Of course the downturn begins when enough of the projects undertaken in the boom are finally seen to be unprofitable based on real resource scarcities, which I suppose one could call "recalculation." However, the more common Austrian point (and Arnold Kling's as well) is that the recovery process itself is where the substantial recalculation must take place. That's why Tyler and Greg rightly referred to DeLong's point as somewhat Austrian.
The other half of the story is where the disagreements begin. Tyler also noted that the early Hayek was in favor of stabilizing nominal GDP and that some/many Austrians today would broadly agree with that (more likely in the form of stabilizing MV). So some number of Austrians believe that recovery requires that a) MV/Nominal GDP not be allowed to crash and b) recalculation must take place. At that level of generality, I think Austrians would agree with DeLong.
The problems come in when one asks what is required to stabilize "aggregate demand." On the monetary side, it seems to me to be a largely empirical question about whether what the Fed has done is "too much." Scott Sumner and Bill Woolsey say "no, not enough;" others, like Larry and George and myself would be more inclined to say "no, it's done way too much." But we all agree that ensuring that MV (and thereby PY) doesn't crash is the point. For Keynesians, however, the case is mostly for fiscal policy.
On the fiscal side, the question is what sorts of policies best allow recalculation to take place. I would argue that fiscal policies to stimulate aggregate demand actually retard the process of recalculation by preventing prices from sending the signals necessary for entrepreneurs to make reliable calculations of profit and loss in deciding how to make the necessary structural adjustments. (The same is true of overly expansionary monetary policy of course.)
To argue that a stimulus or similar is needed to ensure the demand necessary to get recalculation seems to me to miss the main point of the recalculation argument: we've had a decade or more of malinvestment and structural misalignment thanks to the Fed's over-expansive policies and a whole variety of bad fiscal and regulatory policies that distorted market signals and incentives and led to the errors now embedded in the structure of physical and human capital. What we need now is to figure out what those assets are "really" worth and further distoring their values with expansionary fiscal policy just swaps out one misaligned structure for another.
Allowing MV to tank in a slump absolutely makes things unnecessarily worse, but ensuring stabilized nominal GDP or MV is only a necessary not a sufficient condition for a sustainable recovery. Once that "macro" framework is in place, entrepreneurs must be allowed to make use of the best price signals possible to engage in the process of economic (re)calculation that is at the heart of reallocating resources to their more highly valued uses.
In the end, how one understands the recalculation process rests on one's understanding of the centrality of capital to economic coordination. Austrians and Keynesians have strongly contrasting conceptions of capital, and the Austrian claim that markets are going to be better than fiscal policy at ensuring a sustainable restructuring of capital and labor rests on their understanding of the microeconomic coordination process. The debate is still whether or not recalculation is best done through the decentralized process of entrepreneurial appraisal and monetary calculation or through the "guidance" of government policies intended to push resources in one way or another.
It's been going back and forth for a century, I hear.