August 08, 2011
The NYT told readers that a second recession could be even worse than the first. The reason is that people will have less of a cushion going in and that we are supposedly out of policy tools to get us out. There is some serious confusion here that is worth addressing.
First, it is true that most families have little left in reserve to deal with another layoff, so the NYT is absolutely right that a second downturn would really whack people that are already hurting. But there are two important points to make on this.
First, precisely because the economy is still badly depressed in many ways it is much less likely that we will see a recession. Remember a recession means two quarters of negative growth. To have negative growth there have to be sectors of the economy that are shrinking. Typically this would be construction and car purchases.
As it stands, construction (both residential and non-residential) are seriously depressed. It is difficult to imagine that either sector could fall much more than it already has. This means any negative impact that they have on the economy will be very limited. The auto sector is also still well-below pre-recession levels of sales. If it were to dip by another 10-15 percent (a very large dip), it would not have that much impact on the economy.
Consumption more generally is growing, albeit slowly. This is 70 percent of output, and even modest growth in consumption is likely to keep the economy growing. The government sector is shrinking, but only at around a 2 percent annual rate. So, we have to offset a sector that is about 20 percent of GDP shrinking at a 2 percent rate to stay in positive territory.
That is a pretty low bar. I think the double-dip crowd has not done their homework.
The second point is that a double-dip is not the sort of game-changing event that many seem to think. If we have a prolonged period of weak growth, that means rising unemployment and increased suffering. There is no magic to going negative. If we had 2 quarters where the economy shrank by 0.3 percent and followed by a year of 7 percent growth, this would be a great deal.
By contrast, we may be looking at 2 years or more where the growth could be in the range of 2.0 percent or even less. When we have 9.1 percent unemployment, this is an outrage. If we get people applauding because at least we are not seeing a double dip, then we have to calmly escort these ignorant beings to somewhere far away from economic policy discussions. They clearly do not have a clue and need to try a different line of work.
Finally, it is 100 percent nonsense to say that the government is out of policy options. We can do more stimulus. The financial markets are yelling at the government at the top of their lungs saying “borrow more money.” That’s what 2.6 percent interest rate on 10-year Treasury bonds means. There are balanced-budget worshipping politicians who say that the government can’t do anything, but this is not true and the NYT has no business repeating it.
The Fed could also do more. For some reason the article does not mention policies that Ben Bernanke has himself suggested: targeting a long-term interest rate (e.g. a 1.0 percent 5-year Treasury rate) or a higher rate of inflation (e.g. 3-4 percent). The former was mentioned by Bernanke at his Jackson Hole speech last summer; the latter in a paper that he wrote while still a professor at Princeton. Both could help to boost demand and create jobs.
The government could also try to create jobs by taking steps to lower the value of the dollar. The Chinese government has been making threats that it will stop buying up U.S. government debt if we don’t take their advice. The Obama administration could ask what they most want and then do the exact opposite. If the Chinese government stops buying U.S. assets then the dollar will fall against the yuan. This is equivalent to imposing a tariff on Chinese imports and giving a subsidy to U.S. exports. In other words, it should lead to a burst in net exports which will lift the economy and create jobs.
Finally, the government could promote work sharing. Every month employers lay off or fire 2 million workers. If the government gave incentives so that employers were persuaded to shorten hours rather dump employees, and this reduced this figure by 10 percent, it would be equivalent to creating another 200,000 jobs per month.
In short, there is much that the government can do to create jobs. It is understandable that incumbent politicians would want to push the “nothing we can do line” to justify their own failings, however news outlets have no business passing along these excuses which are not true.
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