Notes from Abroad: Why the Persistent Slog?

November 13th, 2013 at 12:12 pm

I write to you from the UK where I’ve been talking a lot about the policy responses to the global downturn, known in the US as the great recession.  In a word, I’d say that many in the political, economic, and investment community are still trying to figure out why it’s been so difficult for almost any of the advanced economies to shake the residual gravitational pull of those bad old days and just get back to a real, bona fide recovery, where output gaps close and we make consistent progress toward full employment.

Yes, European and US austerity are excellent candidates for answering that question, but that just raises the question of why policy makers keep getting this wrong.  And then there’s the fact that central banks, especially the US Fed, but also the ECB, have been moderately to aggressively applying stimulative monetary policy.  And yet, here we remain.

At any rate, I’ve got to run and can’t get into this too much right now—more to come, for sure.  But I did want to note that the IMF recently hosted this high-powered panel on the macroeconomics of crises.  Larry Summers’ comments, which start a bit before minute 46, and have deservedly gotten a fair bit of attention, are very much in the spirit of this question.

Though he does so in less than plain language, Summers asks why, after such a deep recession with such a robust response, particularly in terms of reflating credit markets, do we remain in such a slog?  His answer—not unfamiliar—is that the interest rate is bound by zero and the equilibrium rate—the one needed to close the gaps—is well below that.

And yet, neither fiscal nor monetary authorities seem willing to try to get us there.

Like I said, more to come, but take a listen.

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3 comments in reply to "Notes from Abroad: Why the Persistent Slog?"

  1. Tyler Healey says:

    Do you have a good guess of what the unemployment rate would be today if President Obama and Congress had never raised taxes and cut spending? I think it would be around five percent.


    • urban legend says:

      It looks to me that the official unemployment rate is worthless for judging the health of labor markets. The best measure is the employment-to-population ratio, especially among people in the prime working age (25 – 54) where extended schooling and retirements do not affect the numbers. It continues to be horrendous in the U.S., far below other advanced countries and barely above the bottom we hit almost three years ago, even though the official unemployment rate has dropped from 10.2% to 7.2 or 7.3%.

      The sick overall employment rate represents 15 million or more people who should be employed (and would take jobs if they were available) in a full employment economy but are not. That’s a lot of pain and suffering, and yet these insufferable fools are more concerned about being proved right in the long run — the very long run, it turns out — than ending that suffering. Their slogan seems to be, in between trips to Davos, Aspen and Jackson Hole, “Be patient. You might have to wait a few years, but something will turn up.”

  2. Dave says:

    Sorry, but Larry Summers’ language is always less than clear. He asks rhetorical questions to avoid taking a position, and the times he has taken a strong position he’s almost always been wrong.

    This way of looking at things, where the problem is that the interest rate is too high, is a simplistic and mathematically irrelevant way to look at the problem.

    Let us know when you hear from somebody that knows something worth listening to, please.