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.