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The “New Normal” Is Here to Stay (Unless We Do Something About It)
Real GDP during the Obama recovery has only been half that of the Reagan recovery. Blame Obamanomics? One problem with this theory — or even the idea that the hangover from the financial crisis bears all the blame — is that the economy’s troubles preceded both the Obama presidency and the Great Recession. So there’s a timing issue, one explored in the new paper “The disappointing recovery of output after 2009” by John Fernald of the San Francisco Fed, Stanford’s Robert Hall, Harvard’s James Stock, and Princeton’s Mark Watson.
From the paper: “What appears to be a slow recovery of output is a reflection of something quite different: The U.S. economy suffered a deep recession superimposed on a sharply slowing trend.” In particular, the researches point to declining labor force participation (measuring the active labor force) and slowing total factor productivity growth (measuring innovation) as the “seeds of the disappointing growth in output.”
Concerning productivity, FHSW don’t believe “we aren’t fully measuring the gains from tech-related hardware, software, and digital services” any better or worse than a decade ago. Nor do they see a rising regulatory burden as being the culprit, noting “the industries where regulation increased the most did not for the most part show a decline in productivity growth” since 2008. Instead, the TFP slowdown “reflects a pause, if not an end, to the broad-based, transformative effects of information technology.” AI and robots might boost productivity in the future, but FHSW “have not yet seen those gains in the data.”
Then there is the participation rate problem. FHSW think the “cyclical component was gone by mid-2016” and dismiss the notion that the “decline is mainly the result of demographic shifts.” Beyond that, well, they have an open mind on causality.
OK, so when do things get better? Well, it may be awhile: “Although changes in technology trends are hard to predict, the analysis in our paper does not support such optimism. The disappointing average pace since 2009 included a large cyclical component that will go away. The remaining slow underlying pace of growth instead reflected underlying non-cyclical trends that predated the recession and that have been persistent, to date. Thus, the growth seen during the recovery might, for a while, be as good as it gets.”
Of course, I think policy does matter and can help. And perhaps mismeasurment is a bigger deal. Still, we should assume the worst and act with urgency.
Published in Economics
A society that encourages job growth only in the regulatory sector, perversely values transaction cost creation, does not make babies or products, values immediate security and redistribution over investment and savings for the future and in general does not believe it has anything of a conceptual, moral or ideological nature worth promulgating or projecting into the future is not likely to grow. Why would it?
This is a depressing article, but not surprising. We seem to have lost what it means to be an American in many ways, which I think is relevant here. We are losing our dynamism, where we seem to be more worried about leisure and not working, as opposed to working hard and taking risks. Certainly, the anti-business climate of the last 10 years did not help.
Unleash American entrepreneurship and this problem will be partially solved. Next, GREATLY reduce the safety net and make people work for their bread. Problem solved.
Wow! You have said a mouthful. The only other striking thing which comes to mind is explosive financialization which has taken place – i.e. the creation of a massive amount of paper claims against a limited quantity of wealth. Wealth is created by actual economic activity. To a limited degree, finance can increase economic activity, but we are waaayyyy beyond the limited marginal improvement realm. As water eventually seeks its own level, so with the value of a sea of paper claims.
Nothing to say Old Bathos and civil westman haven’t already said. Jimmy, (that’s James P not Carter, nor Carter’s malaise,) keeps trying to get at the these issues through macroeconomics. You can’t get at economic issues through Macro because it isn’t economics it’s accounting, and not very good accounting at that.
What do we have to fear? We have Mr. “Art of the Deal” in the White House, don’t we? He “wins”! Look at his great policy success this week. What more evidence do we need?