Is the Macro-Economy Really That Much of a Muddle?

June 12th, 2014 at 2:59 pm

I come away from Bin Appelbaum’s (fine) piece in today’s NYT scratching the old head.  The article takes up an issue on which I’ve frequently focused (before the topic was fashionable, if I may snarkily add): the extent to which the protracted downturn has damaged future growth rates.

It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average. Household incomes continue to stagnate, and millions of Americans still can’t find jobs. And a growing number of experts see evidence that the economy will never rebound completely.

So why the head-scratching?  Because of the sense of confusion and disagreement about what all this means and portends.

Here’s a typology of the different views expressed in the piece, as I understand them:

–The economy’s potential growth rate has been slowing down for a while.  Stuff happens.  People age, capital investment retrenches, productivity slows.  The recession didn’t help—and we still haven’t recovered from it—but the slowdown was inevitable.

–Bunk.  We’ll be fine.  Sure, it’s taking a long time to fully recover, but in time we will do so.

–Sorry, but the fact is we’re going to be growing slower post-great-recession.  But that’s because of the recession, or, more precisely, because of the policy mistakes we made that kept us down for so long that we’ve bent the trend.

–Well, yeah…but if you can bend the trend you can mend the trend.  Aggressive policy to close gaps in output and jobs could at least partially reverse the damage.

No one knows which of these is right, of course.  But would not a shave with Occam’s razor lead you to the last one (with relevant observations about the trade deficit sprinkled in, as per Dean Baker’s take from this AM)?

We know that the bursting of the housing bubble caused a huge negative demand shock.  We know the deep recession that ensued meant millions of households took a huge hit to their wealth, their incomes, and their ability to earn.  We know that  gaps in GDP, jobs, and wages remain, even five years into an expansion.

So where’s the big, freakin’ puzzle here?  Investing in public infrastructure, helping the long-term unemployed with extended benefits or direct job creation, targeting the trade deficit to help our manufacturers, pressing on the fiscal and monetary accelerators—I know there are those who will disagree, but these are well-established and well-understood responses, or at least they used to be, to demand contractions, including the one that persists as we speak.

No, I don’t know the future of productivity or growth and neither does anyone else.  But that should only give you pause if you think we’re already at or close enough to full employment such that actions like those just endorsed would be inflationary or lead the Fed to try to offset them.  Neither of those concerns are operative, either at the Fed or among the group represented in bullet point one above (even those who think we’re on a permanently lower growth path still recognize existing gaps).

Of course, the constraints are political and I’ll immediately grant you that the politicians are more confused than the economists.  But granting the not-that-interesting truth that the future is uncertain, I simply don’t understand the apparent confusion about the present, including the necessary prescription to get back on track…even if we don’t know the precise measurements of that particular track.

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20 comments in reply to "Is the Macro-Economy Really That Much of a Muddle?"

  1. Edward Lambert says:

    Hello Jared,
    Productivity and potential GD are not puzzles once you understand effective demand the way that Keynes saw it.
    I just wrote this post today before I saw your post… link

  2. Larry Signor says:

    I don’t believe there is any confusion about the present. The owners of wealth are satisfied with today’s economy, labor be damned. This is extremely short-sighted and definitely not in the best long term interests of the owners of wealth, but is what I see as the driver behind our shrinking economic prospects. [Really, has there ever been a better time for the owners of wealth? Please don't point out the early 1900's. Basic sanitation was in its infancy, paved roads, air travel and antibiotics were in the future.]

  3. Robert Buttons says:

    The “good times” of 2002-2008 was a phony bubble based on cheap credit. The crash was an expected result that should have healed the economy by liquidating all the unprofitable investments of the preceding years. Govt action propped up all these bad investments, crippling the economy by not paving the way for new, profitable ventures. Basically we picked a long, drawn out slog over a big crash and recovery. The solution is big spending cuts, big tax cuts, end QE and let the worthless marked-to-fantasy toxic paper reveal its true value.

    To answer Larry’s point about a good time to be rich: The 1900′s was a much better time to be poor. We still had free markets to allow people to advance. My evidence is in Piketty’s book, figure 9.8. Wealth disparity was lower in the early 1900s. Wealth disparity ROCKETED up in the early 1970′s with the welfare state and the end of Bretton Woods.

    • Larry Signor says:

      RB, There really are some points I agree with you about; not liquidating unprofitable investments, propping up bad investments that did not lead to employment growth and allowing institutional self valuations of financial instruments as opposed to market valuations are all fair criticisms of our policy response to the GR.

      But please explain how the “welfare state” caused wealth disparity to “ROCKET” as opposed to the idea that wealth and income inequality caused an increased need for a more comprehensive safety net?

      Understanding Bretton Woods is not on my bucket list due to time constraints, i.e. I don’t expect to live to be 100, so I’m neutral on that.

      • Robert Buttons says:

        The short answer: Welfare state results in money printing (NB: this is roundabout process, usually referred to as “Credit expansion” but in reality, it’s money printing) to pay for it. The rich have more resources to: (1)weather the resultant inflation and (2) use the financial markets to make money off monetary expansion (3) influence govt to obtain a larger share of the largesse.

        The long answer (a vignette): Joe is a hard working drywall man. He is talented and ambitious and makes a decent living and is able to save. He is not sophisticated enough to understand Wall St, so a savings account is good enough:

        Perfect World scenario: In a hard money environment (ie gold standard), his cash (really, gold) is put in a bank. The interest rate is set by the market, not artificially set by a quasi govt agency (the fed), so he earns money on his deposits. He is able to retire on his modest growth.

        Real World scenario: Joe earns cash and puts it in a bank, the price fixed interest rate and inflation from money printing destroy the value of his savings. He realizes he is not doing well and finds a broker so he can at least keep up with inflation. The Wall St. insiders eat his lunch with bubble stocks and hidden fees. Joe’s savings are essentially robbed and fat cat Wall St. bankers and the politicians they buy make out.

        Piketty has admitted “Those who are gaining from all this printing of money are not the people that you’d like to gain,”

        Compare these two charts and realize inflation is not good for the little guy: (from piketty)

        • Smith says:

          I agree, inflation is not good for the little guy. In some cases it may help the little guy who is under tremendous debt. It also may help if you own a home with a fixed mortgage rate under the rate of inflation. A tremendous amount of boomer got rich this way in the second half of the 20th century.

          For most workers, even modest inflation winds up deflating their salary. The upper 10% never experience due to vastly superior control over their own wages and also prices. They can both increase prices to keep up with inflation (notwithstanding competitive pressure, usually to weak anyway), and raise their fees, or get management to award them increases.

          This seems to have entirely escaped the Krugman solution to boost inflation to a 4% floor so workers wages can adjust in a recession, forestalling unemployment as in Europe. I’d much prefer unemployment and resulting revolution to death by a thousand wage cuts. Unfortunately Europe is turning right because the left is bereft, and where they have some power (U.S. and France) are too busy appeasing business instead implementing Keynesian policy.

          Why does Buttons and Piketty get it and Krugman doesn’t?

          • Larry Signor says:

            There are many ways inflation helps the “little guy”. Inflation has two components; input factor price increases and marginal value added increases. Wages are a primary input so consistently moderate inflation implies consistently moderate wage growth. In the long run…economics is a zero sum game, but we live in the moment which is not a zero sum situation. A fixed debt discount also helps the “little guy”. Profits (which are at unusual levels) would be diminished, implying a more equal distribution of income. Inflation will affect the fixed income sources of the wealthy in ways that will not affect labor. Inflation will also inherently devalue the dollar. This will be a positive for the national account balance, implying a higher labor demand. What’s not to like about 4% inflation?

          • Larry Signor says:

            Here is a very detailed paper by Irving Fisher which lays out the deflation, reflation, inflation argument;


          • Robert Buttons says:

            I find it incomprehensible that anyone who has lived through the 70′s can think inflation is good.Look at the data. The massive uptick in inflation in 1971 almost perfectly correlates with rising inequality. Piketty himself argues that money printing helps the “haves”.

        • Barry says:

          “…weather the resultant inflation…”

          The 1970′s are calling

        • Julio says:

          You seem to start from an anti-inflation stance and then find evidence, and create scenarios, that confirm your position.
          Rises in inequality have occurred under many different conditions throughout modern history. And even in our recent past, we have rising inequality in periods of double-digit inflation and periods of one percent inflation.

          As for your scenarios, you are assuming that the worker can retire on his savings, if they were only safe from inflation. I would argue that the problem is the weak position of labor that cannot negotiate wage rises and retirement terms. The few remaining workers with sufficient retirement are government unionized workers, and their benefits are under severe attack.

          The main reason we end up in the hands of Wall St. Shysters is that few of us have enough funds to retire on, say, TIPS. Your “perfect world” scenario has become a fantasy, with or without inflation people don’t have enough to retire on.

    • Smith says:

      Doesn’t hurt to have the original link:
      The comment above echos the conservative minded nysun

      I don’t have the book yet to check if there alternatives offered why 1971 is an inflection point. I don’t buy into the Bretton Woods explanation, it meant currencies would float in value, which would affect trade, but the top ten percent did not get rich trading currency. High inflation in the 1970s became a continuous problem, most attribute Vietnam War deficits as a contributing cause, Bretton Woods was accompanied by a wage price freeze which didn’t affect everyone equally, the hollowing out of the rust belt accelerated in the 1970s, things went downhill from there. In the 1980s corporations downsized and consolidated further, while unions were further beaten down.
      The yen rose in value, which should have helped U.S. trade deficit? Don’t we complain China manipulates their currency to lower it?
      Correlation is not causation. You need to show numbers tying Bretton Woods to income of 10%. I thought I read salaries of the top 10 percent just kept increasing while the 90% stagnated. That doesn’t sound like anything to do with Bretton Woods. Rising inequality continues unabated through good times and bad according to the graph.

  4. Robert Buttons says:

    Herbert Hoover, 1932 (the problem)
    “we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. . . . No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. . . . For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.
    Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for . . . “the common run of men and women.” Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction”

    FDR (the solution):
    ” “not that the system of free enterprise for profit has failed in this generation, but that it has not yet been tried…”

  5. Kevin Rica says:

    Dean Baker’s piece was excellent. The two things that this Administration has refused to do is reduce the trade deficit (even at the cost of renouncing Rubinomics) and fix immigration by reducing immigration to the numbers the economy actually needs (a negative number today).

  6. Tom in MN says:

    The lack of infrastructure spending is completely incomprehensible to me. Borrowing is cheap (or even free if the new infrastructure leads to higher productivity, etc) and we need all sorts of infrastructure. Exactly when are we going to replace our bridges that are designed to last for 50 years (not considering increases in traffic) and currently average 45 years old? Even if you don’t believe spending on it will stimulate the economy, we need this stuff built. And if you are a Walton and personally travel by helicopter, you still need your trucks to get to your stores.

    • Redwood Rhiadra says:

      The reason the GOP won’t allow the government to spend on infrastructure? Their corporate masters plan on making a killing on private roads and bridges. First they let the infrastructure fail completely, then they’ll claim that free-market private infrastructure will do it better if only the government gives them the rights-of-way (for pennies on the dollar, naturally) and lets them track cars by GPS to bill by the mile. Welcome to the future – every road a toll road, every bridge a toll bridge.

  7. JohnR says:

    “The 1900′s was a much better time to be poor. We still had free markets to allow people to advance.”

    I must be still struggling with my Monday caffeine shortage, because this seems to me to be an astonishing claim. Perhaps my understanding of history has been less comprehensive than Mr. Buttons’, or perhaps I am simply misunderstanding his statement. From what I understand, the 1900′s were a terrible time to be poor; significantly worse than today. At least today there exists some minimal level of social safety net, despite the multi-generation attempt by the GOP to eradicate all traces of The New Deal, Great Society and any other Red Menace social assistance program. I suppose the problem might arise from how we define the term “poor”, though.

  8. ezra abrams says:

    the liberal environmentalist says
    why is more asphalt, more cars, more trucks , more concrete always the answer ?
    How about an answer that isn’t an eco catastrophe ?
    Like, say, employ 200,000 people to rebuild affordable housing and mass transit in major cities
    or, employ 100,000 people to fix our national parks, and extend them – the former canal (not the Erie) that stretches south from Rochester NY is a prime candidate for a fabulous public recreation project

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