June 12, 2014
Binyamin Appelbaum had an interesting piece in the NYT more or less summarizing views of economists on the economy’s near and long-term problems. The piece reflected the incredible confusion among economists. This raises the obvious question, if economists really have no clue about the economy, why do we waste good money on them?
Anyhow, we find that we are suffering from too many workers (high unemployment) and likely to continue to experience high rates of unemployment for the indefinite future due to a lack of demand in the economy. A big part of the problem from this view is that with the inflation rate near zero, the real interest rate (the nominal interest rate minus the inflation rate) can’t fall low enough to bring the economy back to full employment since the nominal interest rate can’t be negative (or at least not with conventional policy).
At the same time that the economy is suffering from too many workers we are supposed to also be troubled by the prospect of too few workers. Hence it is bad news that immigration has slowed, and for the longer term future, the birth rate has dropped. It’s a bit hard to see this one. There could be an argument that shortages of workers with specific skills are holding up the recovery, but believers in markets know that shortages manifest themselves in rising prices, or in this case wages. There are no major areas of the economy (by occupation or location — sorry North Dakota ain’t major) with rapidly rising wages. So it’s hard to see how getting more workers would provide a big boost to the economy. (More foreign doctors could drive their wages down to the averages for other wealthy countries, but I wouldn’t consider this a big macro effect and I doubt these are the immigrants other economists are envisioning.)
Remarkably, trade does not appear anywhere in this discussion. In the old days, econ textbooks told students that relatively wealthy countries, like the United States, are supposed to be exporters of capital to relatively poor countries, like China. This was part of the story of comparative advantage, capital is relatively plentiful in rich countries and relatively scarce in poor countries.
Exporting capital means running trade surpluses. In fact we have been running trade deficits, and in the years since the East Asian financial crisis in 1997 (which sent the value of the dollar soaring) we have been running very large deficits. In the most recent quarter’s data our deficit was just over $500 billion, or 2.9 percent of GDP. This creates a gap in demand that we have to fill from either more consumption, investment, or government spending.(That’s definitional — if you don’t like it, that’s too bad, it is an inescapable truth.)
It is not easy to find a mechanism to boost these components of spending as the research cited in these articles shows. Consumption is actually quite high today relative to disposable income. Insofar as income can be shifted from the rich to the middle class and poor it can lead to somewhat more consumption, but it’s hard to believe we would fill the gap created by trade.
Non-residential investment is actually close to pre-recession levels measured as a share of GDP. We can see some boost, but a rise of 2.9 percentage points of GDP would take us above the shares during the tech bubble at the end of the 1990s. Residential investment has some room to grow, but its absurd to imagine it will get to the bubble peaks. In fact, given current demographics and the rise in health care spending as a share of GDP, it is unlikely we will even get to the pre-bubble average of just over 4.0 percent of GDP. At the moment, extraordinarily high vacancy rates explain the continuing weakness of the housing sector.
We could of course boost the economy with more government spending, but politicians don’t like strawberry ice cream or budget deficits. So this means we really don’t have any way to replace the demand lost to the trade deficit, but for some reason no one wants to discuss it. Oh well, I guess the Catholic Church use to impose strict limits on debate back in Medieval times.
There is one other point that is worth noting in this discussion. We have seen extremely weak productivity growth since the recession. While some have argued that this is a long-term trend, there is an important sense in which productivity growth is an endogenous outcome that depends on the state of the labor market. When the economy is weak and therefore not generating decent jobs, even highly educated workers end up taking low paying low productivity jobs. We have lots of college grads who are now working in fast food restaurants.
This leads to lower economy-wide productivity. It would be wrong to infer that the slow rate of recent productivity growth reflects the economy’s underlying potential, as opposed to the failure to have enough growth. In short, weak productivity growth is primarily the result of the ban on discussion of the trade deficit and politicians’ dislike of strawberry ice cream and budget deficits.
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