May 22, 2014
I’m back (thanks for all the kind comments) and I see I have to correct some seriously misleading commentary from Robert Samuelson earlier in the week. Samuelson concluded a discussion of Timothy Geithner’s new book:
“This is the central lesson of the crisis. Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. This also happened in the 1960s, when the belief that economists could control the business cycle led to inflation and instability in the 1970s and early 1980s. But the lesson is not acknowledged because its implications are unpopular (an obsession with short-term stability may backfire), and it’s ignored — or even denied — by the post-crisis narratives, including Geithner’s.”
Sorry, this one is not quite right. The pain suffered by people in the 1970s is not in the same ballpark as with the Great Recession. In the 1970s the stock market tanked, but since most people own little or no stock, who gives a damn? The economy generated 19.7 million jobs in the decade, an increase of 27.6 percent. By contrast in the 14 years from January of 2000 to January of 2014 the economy created just 6.5 million jobs, an increase of just 5.0 percent.
Most of this difference is explained by demographics (the baby boomers were entering the labor force in the 1970s, they are starting to leave now), but it was still an impressive feat to accommodate such a large expansion of the labor force in a relatively short period of time. In addition, the economy was hit by two large oil shocks that made the process considerably more difficult.
There was no prolonged period in which the economy was below its potential level of output in the 1970s. In fact, the Congressional Budget Office (CBO) puts the economy as operating above potential output for part of the decade. By contrast, CBO calculates that the economy has been roughly 6 percent below potential GDP for most of the last 5 years (@ $1 trillion a year). This represents a massive amount of lost output.
And, in direct contradiction of Samuelson’s assertion, the failure to deal with the short-term can lead to serious long-term consequences. A recent paper by the Fed calculates that that potential GDP has fallen sharply as a result of the prolonged downturn. This implies that the failure to carry through short-term stabilization can lead to serious long-term consequences.
In short, Samuelson’s central lesson lacks any evidence or logic to support it.
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