September 22, 2015
There is an annoying tendency among elite types to assume that their ignorance on important issues is shared by others. Washington Post columnist Robert Samuelson gave us a great example of the effort to project his misunderstanding of the economy when he told readers:
“Over the past decade, there has been a profound shift in its public standing. Before the 2008–09 financial crisis, the Fed enjoyed enormous prestige and freedom of action. All the Fed had to do, it seemed, was tweak short-term interest rates to keep expansions long and recessions short. What’s clear now is that we vastly exaggerated the Fed’s powers of economic management.”
Sorry folks, but Samuelson is describing his own need for rethinking, not the need for those with a better understanding of the economy. We had recalled the weak recovery from the 2001 recession. While the GDP recovery was impressive, the labor market recovery was not. While the recession officially ended in December of 2001, we continued to lose jobs all through 2002 and until September of 2003. We didn’t get back the jobs lost in the downturn until January of 2005. At the time this was the longest period without job growth since the Great Depression. The Fed’s pushing its short-term interest rate down to just 1.0 percent did not seem to help much.
This led us to be very concerned about the difficulty in recovering from the recession that would inevitably follow the collapse of the housing bubble, which was visible to those with clear eyes long before it burst. So the confusion on these issues belongs to Samuelson, not to “we.”
Unfortunately his confusion continues. He tells readers that the economy is near full employment. This is only true if we think that millions of people in their thirties and forties have opted for early retirement since the beginning of the recession. These people have dropped out of the labor force and are therefore not counted as unemployed. The amount of involuntary part-time and quit rates are still both at recession levels.
He then says:
“the financial crisis and Great Recession so traumatized consumers and businesses that they reined in their spending and risk-taking.”
Nope, consumption is actually very high relative to disposable income or GDP. This is a fact that is well know to those with access to government GDP data (i.e. everyone). Similarly, the investment share of GDP is pretty much back to its pre-recession level.
The explanation for the continued doldrums is actually very simple. We have nothing to fill the demand gap created by a trade deficit of 3 percent of GDP (@ $500 billion a year). In the last decade we had the housing bubble, but in the absence of the bubble, there is no easy way to fill that gap. We could do it with budget deficits, but that gets our friends at the Post really upset. Instead, we get high unemployment and weak wage growth, and people are unhappy. It’s all so complicated.
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