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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.