March 31, 2014
Economics is a great profession for people who are not very good at their work. Messing up all the time does not affect at all your ability to maintain a high-paying job and get people to take your views seriously.
Hence we have Robert Samuelson warning us that we might have to just accept that we will be faced with continuing slow growth and high unemployment. First off, it is important to sort out two different issues which Samuelson mushes together.
The first one is the extent to which we should expect the unemployment rate to fall as the economy returns to full employment or something like it. The second issue is the rate of productivity growth that the economy can sustain going forward. These are very different issues that are at most tangentially related.
The first one is about a level of output and employment. We saw a plunge in demand when the housing bubble burst. Those of us familiar with intro economics were not surprised by the downturn nor the weak recovery, since there is no source of private sector demand to replace the demand that had been generated by the bubble. We saw more than a trillion dollars of annual demand disappear when the construction driven by the bubble disappeared along with the consumption driven by $8 trillion in housing bubble generated equity that vanished with the crash.
The public sector could replace the demand, but people like Robert Samuelson and his buddies in the Washington elite like low budget deficits more than they care about seeing people have jobs. In short, there is no mystery about the economy not returning back to potential GDP and continuing high unemployment. It is exactly what the textbook economics would predict.
The other part of the story is the rate of growth going forward. This will depend on the rate of productivity growth. (It also depends on the rate of labor force growth, but we are not likely to see big surprises there.) The pessimists cited in Samuelson’s piece argue that we should expect a prolonged period of weak productivity growth going forward.
There are two points that need to be made in this context. First, the track record of economists in predicting long-term trends in productivity growth is absolutely awful. (Yes, this is incredibly important for economics. So what?) Almost no economists saw the 1973 productivity slowdown coming. Even four decades after the fact there is no agreed upon explanation for this slowdown. And, very few economists saw the 1995 uptick coming, although at least we are fairly clear on why it took place. Anyhow, when you see economists making confident predictions about the pace of productivity growth going forward for the indefinite future, you are entitled to some serious giggling.
The other point worth noting about the productivity story is that it is 180 degrees at odds with the robots taking our jobs story that is gaining popularity. The robots story is one of surging productivity growth the likes of which we have never seen before.
I’m a skeptic on the robot view, but regardless of this skepticism, this is simply a logical point. It’s possible that we have reached limits beyond which technology will only produce modest gains in productivity. It’s also possible that robots and other technologies will lead to unparalleled increases in productivity. But both cannot possible be true. If you’re with the robots, then Samuelson is completely off the mark.
Let’s return to the level of output that is consistent with a stable rate of inflation or the non-accelerating inflation rate of unemployment (NAIRU) in the standard economics view. Samuelson would have us believe that it is something like 6.0 or even 6.5 percent now. (Thankfully he notes that “to be fair, there’s no consensus.” He then gives Mark Zandi as “one dissenter.” Of course the vast majority of economists, including those running the Fed, would qualify as dissenters from Samuelson’s line.)
The record of economists in telling us how low the unemployment rate can go before triggering accelerating inflation is also atrocious. In the early and mid 1990s it was an absolute consensus in the economics profession that the unemployment rate could not get much below 6.0 percent without triggering accelerating inflation. In fact, Robert Gordon, who is one of the productivity pessimists cited in this piece was one of the leading proponents of the 6.0 percent NAIRU view. The Fed raised the federal funds rate by three full percentage points from February of 1994 to March of 1995 precisely because it feared letting the unemployment rate fall below its NAIRU target.
While most economists thought the Fed should continue to maintain high interest rates to keep the unemployment rate from falling further (including Clinton appointees to the Fed, Lawrence Meyer and Janet Yellen), Greenspan lowered rates and allowed the unemployment rate to fall because he was not a believer in the economics orthodoxy.
As a result, the unemployment rate was well below the conventional estimates of NAIRU for the four years from 1997 through 2000, with unemployment reaching 4.0 percent as a year-round average in 2000. Not only did this allow millions of people to work who would otherwise not have the opportunity, it also was the only period since the early 1970s when workers up and down the wage ladder saw substantial real wage gains. And, there was no acceleration of inflation. (Yes, this is the topic of my book with Jared Bernstein.)
The economists arguing for a 6.0 percent NAIRU back in 1995 had a far better case for their position in the mid-1990s then the crew Samuelson is turning to now. At that time the economy had not seen a prolonged period of low unemployment for more than two decades. This provided substantial statistical support for their position. The current crew has no real statistical support for their position, just a lot of handwaving, and of course friends in important positions.
To put it simply, the claim that the economy can’t do better in terms of generating jobs and income for the less well off depends exclusively on the authority of people who have been almost completely wrong on every important macro economic development for the last two decades. So you better listen!
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