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Why Has the U.S. Recovery Been So Slow?

The US economy, as conventionally measured by GDP, has grown just over 2% annually over the course of the current recovery. That’s glacially and painfully slow by historic standards (although it might look pretty good if you are Europe.). At the same time, the share of Americans with a job has barely improved from its post-Great Recession low. Goldman Sachs offers its explanation for the Not-So-Great-Recovery:

The reasons for the long-lasting weakness resemble those of many other post-crisis episodes. They include excess supply of houses, pressure to deleverage consumer balance sheets, the global nature of the crisis, and the cyclically premature turn to fiscal retrenchment.

Indeed, these reasons are very much in keeping with the Reinhart-Rogoff thesis on how economies recover after a financial crisis. As an addendum I would point to The Recovery of Housing and the End of the Slow Recovery? by former Fed economist Michael Bordo, which finds the slow recovery largely attributable to the unprecedented housing bust that accompanied the financial crisis. But here is the really interesting bit from Goldman, a conclusion reflected in the above chart:

It would have taken a deeply negative real interest rate—or more broadly, a much bigger boost from conventional and unconventional monetary policy than the Fed managed to deliver—to offset these drags and return the economy more quickly to full employment. This is illustrated in simple terms in our GS Taylor rule in Exhibit 4, which suggests that the “appropriate” funds rate has been negative since 2008.

1. Yes — as market monetarists have been saying — had the Bernanke Fed been more aggressive the past five years, not only might the US have avoided as severe a downturn in 2008, but the recovery would have been far more vigorous. And had the Fed early on firmly committed to boosting total spending in the economy, it may have still done a quantitative easing program, but the bond buys may not have been as a large. In short, the US has experienced a minor replay of the Fed’s monetary mistakes during 1930s.

2. And if you accept the above thesis, it means you reject — as Goldman Sachs explicitly does — the “secular stagantion” thesis recently put forward by Larry Summers, which argued there are some deep seated problems — such as, perhaps, too little innovation, bad demographics — with the economy. Goldman sees the problems as more cyclical than secular. The Secular Stagnationists, by the way, seem to be arguing for a lot more government spending to boost demand.

3. So what role does Obamanomics play in all this? It certainly hasn’t been a plus.The 2013 tax hikes hurt growth (far more than the sequester), the stimulus could have been better designed, and policy uncertainty — whether about debt or Obamacare — may have some drag on growth. But what President Obama did or did not do with fiscal policy would seem to have been less important that (a) the nature of the recession and (b) the Fed’s response. Still it’s worth mentioning that over the longer-term, Obama’s push for higher tax rates and a more regulated economy and his decision to leaved entitlements unreformed hurts the US economy’s growth potential.

  1. J.Maestro

    I can’t speak to macro factors, but from my micro vantage point I think a lot of this stems from regulatory risk. My household budget and my savings plan are extremely defensive

    The main worry is employment — to find another job means finding a company that not only has sufficient cash flow but also an appetite for risk. I can’t assume I’ll find a new employer willing to run the regulation and litigation gauntlet just to bring me on.

    Start a business? Same problems: there’s no way to know whether you’re in compliance with all the traps the government lays. So unless I come up with a perfect scam I will probably avoid anything entrepreneurial.

    Invest? Yeah, maybe in the stocks of company’s that have good political connections. But they are already over-bought. (And I can’t grasp how QE has not jacked their price.)

    And what savings/property I do own, is it even mine? Lawmakers seem to think they can redefine what’s mine. Legislative gridlock is my only comfort.

  2. bagodonuts

    Jim,

    What exactly would “a deeply negative real interest rate—or more broadly, a much bigger boost from conventional and unconventional monetary policy than the Fed managed to deliver” look like? Right now, the Fed is buying $85 billion in securities every month. Should that be $170 billion? $340 billion? $700 billion? $1 trillion? Per month? I understand that Scott Sumner wants a nominal GDP target, but if the issue is not quantitatively easing enough, how much is enough? 

  3. J Climacus

    James sounds like all central planners, whose schemes always work in retrospect (if only we had eased money just a little bit more! If only the stimulus had been better spent!), but somehow never work going forward.  Would the recovery have been faster with a more accommodating policy? Who knows? Would the stimulus have worked if Obama hadn’t blown it all paying off his political cronies rather than on the infrastructure projects he promised? Who knows? What we do know is that the monetarists got the easy money they wanted and Obama got his spending spree and it didn’t work.

    It used to be common conservative sense that prosperity isn’t generated by the national bank gaming the currency or the government getting its spending spree just right, but by limited government, sound money and a free market.  How about giving those a try?

  4. Linc Wolverton

    The$6 trillion in stimulus (government expenditures less revenues since 2009) and monetary expansion have failed miserably.

    The problem, I believe, stems from the failure to recognize the impact of severely reduced household net worth. As housing values fell, driving net worth down (especially if the prior housing values were used for equity loans — for college tuition, BMWs, second homes), people were unwilling or unable to consume more. While the stock market provided some relief, savings and the bond market provided virtually none, especially with the Fed keeping interest rates low.

    Until people’s net worth is rebuilt, no amount of stimulus or monetary expansion will end the recession.

  5. JERRY WARD

    Just when the big missing ingredient of a healthy recovery was investment, the administration seemed to go out of its way to make investment more risky. The Dodd-Frank bill and Obamacare both signaled  extensive new regulation to come, regulation that would not be defined in operational detail for years to come. There was no relief of corporate taxes to leave more profit available for investment, nor of capital gains taxes. It seemed as if the government wanted to block the free-market from performing its magic.

  6. J.Maestro

    And another “micro” thing: the Fed thinks it’s keeping housing propped up by buying all those mortgage backed securities. Macro stats come in looking better, so everyone cheers.

    But would any of us here, as individuals, want to lend our own savings to those homebuyers? Would we consider it a safe bet?

    And if the answer is no, then it can only be harmful for a government actor to pursue a policy of “mal-investment” just to jack the macro metrics. Especially when the effect is to keep purchase prices artificially high — dooming under-employed young people (already indentured by debt-fueled tuition rates) to extra years of living in their parents’ basements instead of creating their own households.

  7. Z in MT

    “It used to be common conservative sense that prosperity isn’t generated by the national bank gaming the currency or the government getting its spending spree just right, but by limited government, sound money and a free market.  How about giving those a try?”

    Yes.  It was kind of my understanding that monetary policy can shift real economic growth around (i.e. pro-cyclic or counter-cyclic), but long term growth is a result of government regulatory and tax policy.  This long run of positive but lowish GDP growth is likely due to good Fed policy coupled with poor Federal regulatory policy.

    The market monetarists want the Fed to create an inflation bubble in the hope that it will create business and consumer confidence.  This is just a different flavor of the Keynesian delusion.   The real result will just be 70′s style stagflation.

  8. bellcpa

    There has been a recovery?  Maybe on Wall Street, in government at all levels, and in the halls of the crony capitalists, all funded with funny money from Bernanke.  Small business in America, on the other hand, is hanging on, wondering how it will get screwed tomorrow.  Unfortunately (or not), small business does not have the ability to buy its way into the elite moneyed political class that now runs this country.  Nor the desire.

  9. Owl of Minerva

    There’s been much talk about the rise of the robots during this economy. Manufacturing has come back to the US but mostly because it is so automated that it’s not worth dealing with the headaches of working with East Asian companies. The old joke is that all you need is a man and a dog to run a lot of the factories. The man feeds the dog, and the dog keeps the man from touching anything.

    The real trouble is that the few jobs these places require are all for folks with advanced educations, and even they are few in number. All the really represent is how firms are squeezing efficiency blood out of the robot stone. Ugh, terrible metaphor. Anyway, the perverse social contract for these decisions is to enroll old working class employees into social welfare programs or service sector jobs, a la Cowan’s recent book about the end of average.

    I’d like to be more optimistic, but I’m an academic looking at the most anemic job market I have ever seen. My best bet is government work, and look how that turned out for Detroit.