One can waste a lot of time arguing with the oped page of the WSJ, but this piece by economist John Taylor seemed worth a brief response, as he’s going after an argument that has resonated with many in recent weeks: secular stagnation.
In a recent speech I’ve featured here in numerous posts, Larry Summers raised the possibility that the economy is growing below its potential, with all the ancillary problems that engenders (e.g., weak job and income growth), and not just in recession, but in recovery. Stagnation is by definition expected in recession, but not in an expansion, ergo “secular stagnation.”
I’ve talked about this for years under the rubric of slack labor markets, which have led to diminished bargaining power and stagnant real earnings for many in the workforce. It is also a contributor to increased inequality.
Taylor argues, however, that secular stagnation is “hokem.” His argument rest on two points, both of which seem obviously wrong.
First, he claims that the current recovery has been weak is not due to any underlying problems in the private sector or lousy fiscal policy, but due to “policy uncertainty, increased regulation, including through the Dodd Frank and Affordable Care Act.” But the recovery began in the second half of 2009, well before either of those measures took effect. And, in fact, since they’ve done so, if anything, growth and jobs have accelerated. Financial markets have done particularly well—I’d like to hear Mr. Taylor’s explanation of how “uncertainty” around Dodd-Frank explains the S&P’s 2013 performance.
Taylor’s antipathy toward fiscal stimulus leads him to completely omit the fact of austerity in the form of fiscal drag as a factor in the weak recovery. The US budget deficit fell from 10% to 4%, 2009-2013, the largest four-year decline since 1950. Given Taylor’s views regarding deficits crowding out private investment, this trend is an inconvenient truth that in his model should have boosted growth.
His second argument is that if secular stagnation were a real problem, we would have seen it in the 2000s expansion, yet instead we saw “boom-like conditions, especially in residential investment.”
This misses the key point of Summers’ argument:
If you go back and study the economy prior to the crisis, there is something a little bit odd. Many people believe that monetary policy was too easy. Everybody agrees that there was a vast amount of imprudent lending going on [there’s Taylor’s “residential investment”—i.e., the housing bubble]. Almost everybody agrees that wealth, as it was experienced by households, was in excess of its reality. Too easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilization wasn’t under any great pressure; unemployment wasn’t under any remarkably low level; inflation was entirely quiescent, so somehow even a great bubble wasn’t enough to produce any excess in aggregate demand.
Yes, there was a lot—too much—residential investment, but employment growth was terribly weak (up 20% in the prior two cycles, up 4% in the 2000s one); unemployment fell to 5% by the end of the 2000 recovery, but the share of the population employed actually declined. Real GDP grew almost a point more slowly per year over the 2000s business cycle relative to the prior two cycles. Business investment grew less than half as fast in the 2000s than it did in the 1990s. In fact, after rising pretty steeply in the 1990s, CBO’s estimate of potential GDP fell sharply in the 2000s (see figure below), a serious cost of the problem Summers is raising and Taylor is wrongly debunking.
It’s also worth noting that middle-class incomes and poverty rates did much better in the 1990s, thanks to full employment conditions in the latter half of that cycle, than in the 2000s, when slack labor markets led to a flattening trend in real median income and increasing poverty rates.
I doubt any of this will convince Taylor and others who simply want to go after the ACA, the Fed, stimulus measures, et al. But those of us interested in blazing the path back to full employment should recognize these arguments as politically motivated distractions.