Expectations for better results are continuously dashed; GDP growth never reaches escape velocity; housing is at best bumping along the bottom; the engine of job growth has shifted from first gear to neutral; unemployment is UP, not down, from 8.8% in March to 9.2% last month.
Perhaps it would be useful to take a moment and just catalogue what’s going wrong.
–Liquidity trap/zero lower bound; fading stimulus: As Paul Krugman and Brad DeLong point out, this is key. The usual anti-recessionary move by the Federal Reserve is to lower the interest rate until they get some traction in investment, home buying, etc. But what if that doesn’t work, because industry has so much excess capacity (including cash reserves), there’s huge supply excess in the job and housing markets, and after binging on debt, folks want to deleverage?
Well, the Fed can keep jacking down rates, but they can’t go below zero (or else lenders would be paying you to borrow their money). And that’s where things have stood for a while now. So traditional monetary policy is ineffective.
That leaves fiscal policy, i.e., stimulus, which is facing two big problems right now. First, the Recovery Act is winding down, so no help there. But worse, the realization that we need to do more in this space is under attack by politicians of all stripes. The R’s want to argue the Recovery Act failed, and prominent D’s either seem to largely agree or at least don’t want to get near anything Keynesian. I haven’t seen such a lack of stimulus since my days of dating back in high school.
–The weak job market: It’s a 70% consumption economy, and if jobs and paychecks are scarce and fiscal/monetary stimuli are fading, ain’t much good gonna happen. It’s a self-reinforcing weak demand cycle.
–Productivity and technology: There used to be something called “labor hoarding” where even when demand faltered, firms would hold on to many of their workers, either because of union contracts or because they wanted to make sure their workforce was around when things began to pick up (imagine that?!).
Now, firms engage in a “just-in-time-inventory” approach to hiring. It’s a more lean approach, hiring up when demand spikes and laying off when it tapers. You squeeze more productivity out of the folks you keep, and avoid committing to permanent hires for as long as you can.
There might be something else going on here too. I’ve heard anecdotes that lead to me wonder whether the pace of “labor-saving technology” is accelerating, especially in manufacturing. It’s been going on forever, of course, but I have a feeling that the capital intensivity of production is increasing at a faster rate. More to come on this in later posts as I learn more about it.
--China’s absorbing what little demand we can muster. When countries go all mercantile at a time like this, managing their currency to grab export share here and block imports over there, it makes it that much harder for us to tap an important escape hatch: a lower dollar stimulating exports.
–Bad tax incentives that encourage overseas production often in emerging economies that manage their currencies (see above).
--Destabilizing uncertainty in the business community based on page 745 of the Affordable Care Act, which phases in on July 17, 2092…kidding!
–Actual uncertainty regarding the debt ceiling.
–Headwinds: Oil, Japan supply disruptions, Greek debt—these are all fading to one degree or another, but with all these other fragilities, even little bumps on the road can break an axle.
–The absence of union power in tandem with high unemployment, leads to weak bargaining power so that whatever growth there is bypasses the broad middle class and goes right to the top of the income scale, where demand ends up narrowly concentrated.
I’m sure I’m forgetting other aspects of the problem and if I come up with more, I’ll update.
But the funny thing is that when I hear most people talk about this stuff, or when I go on TV to do so, hardly any of these reasons come up. Instead, it’s all debt and deficits, too much gov’t spending, the absence of business confidence, high taxes, regulations, the Recovery Act (and not that it was too small!), the Fed (and not that they haven’t done enough!).
We’re into some deep misdiagnosis, which does not bode well for the cure.