Why Isn't The (U.S....or Western European) Economy Growing?

Kevin Drum at Mother Jones lists out the prominent theories for our stagnant, jobless economic "recovery." The situations in the U.S. and western Europe are somewhat different.

The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through. Given the size of the 2008 collapse, historical evidence suggests that it's going to take five or six years to recover, and that's that.

It's more complicated than that of course, but I basically agree. I don't think the U.S. can have a strong recovery until the U.S. consumer finishes deleveraging and the excess inventory and foreclosure process in the housing market has worked its way through the system. 3-5 years seems about right for a minimum time frame until consumers are at a sustainable debt level. Boosting savings is painful process for a country whose consumers are deeply in debt, and many on this forum noted the problem years before the recession started. No one was blindsided by where we are now.

The Tyler Cowen "Great Stagnation" hypothesis. We've picked through all the low-hanging economic fruit over the past century, and like it or not, we're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.

I read the book and loved it, but am not entirely sure any of it is true. There's a compelling argument that our success as a nation had to do with the vastness of our unexploited space and the population growth potential it afforded us in our first hundred years as a nation and then the massive volume of our resource base for turning us into the world's most powerful economy in the 19th century and the world's most powerful country in the 20th.

If the 19th century was about growing the population and filling up the west with farmers, the 20th century was about moving most of those people back into our urban industrialized centers. Educating those people and their children and leveraging the huge value of that labor pool, while simultaneously exploiting our vast petroleum reserves was the last of our "low hanging fruit" to sustain high levels of economic growth. Once that process was largely completed in mid century, by the 1980s, all we had left to turn to was credit and asset bubbles.

Again, it's a compelling story, but is it true? I don't know.

But if it is true, it's also terrible news for China. They're already a net energy importer. Their only low hanging fruit asset is the process of moving peasant farmers back into urban industrial centers and building a larger and larger skilled labor pool. It's not going to sustain them for a century of growth, or even half a century. This process will be tapped out within a generation, maybe within 10-15 years.

The related (I think) investment drought hypothesis. Ben Bernanke famously ascribed the housing bubble partly to a "savings glut" from overseas, and the flip side of that is an investment drought. The reason financial assets became so popular is that, even with all that money sloshing around the system, there simply weren't very many high-quality investment opportunities available in firms that make real-world goods and services, and that hasn't changed.

Whether our last two asset bubbles were caused by a "savings glut" or bad monetary policy during the Greenspan era, or whether those two are functionally the same thing, I don't know. I think the Fed under Greenspan shifted its mission away from its core dual employment/inflation mandate to that of protecting the value of equity markets. Underlying both the great asset bubbles of the past 15 years was the debt/credit bubble, and all the things the Greenspan Fed may or may not have done to make it even worse.

The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession. We're now in a c

 

Excellent summary of all of those theories!

I think this is a result of a couple of the ones you listed.

First, I believe this one above all:

I think what we have seen unfold is basically exactly what was promised by most economists in major news publications following the Lehman crash and subsequent financial turmoil. Most experts warned that an asset bubble would take years to get through, and raised Japan as a prime example of how excruciating it can be.

However, the government response immediately following the crisis was excellent (and credit goes to both the Bush and Obama administrations, and Democratic Congress for their pragmatism). Thanks to their efforts, we saw a much shorter period of contraction than we would had otherwise, and the economy grew at a decent clip in the latter half of 2009 and in 2010 - slow, but respectable given the circumstances. I think, had stimulus continued in some form, we would be seeing slower-than-2010 but still decent growth in 2011. These external shocks such as the Japan quake, oil price spike and European debt crises have hurt growth in 2011 but what has been the real coup de gras has been severe and unnecessary austerity cuts proposed by the Republican/Tea Party party (and supported in the early months by the Obama administration out of political cowardice).

Without government stimulus to pick up the slack, the economy is going to remain really weak into 2012 and could easily be tipped back into recession (if it hasn't already by the July stock market crash) by another outside shock. What this is ultimately going to do is delay the overall timeline of how long it takes to get back to normal. What would have been a five year period has probably become seven or eight with slow growth and continued cuts, or perhaps the entire decade if we re-enter recession, thanks to these Tea Party dingbats and President Obama's failure to tell them to **** off.

I agree with this as well. As you said in another thread, oil prices are beyond the USA's control in the immediate future, as demand from China and India are going to push up prices entirely on their own.

However, I saw an interesting piece the other day that describes how oil production is shifting away from the Middle East and back to the Americas. Essentially, its core argument is that political upheaval permanently disrupts

 

The challenge is the combination of three of the above "theories."

If the problem is just the first one - that we are slllooowwwwwlllly working our way through a credit/asset bubble, then the solution is pure Keynesian stimulus.

But if it's a combination of that plus constrained oil supplies, then we have a much more complex global economic problem. And there's good evidence that economic growth in 2005-06 drove up oil prices and caused an oil shock a year or so after the housing peak, and that we also suffered a second mini oil shock in 2010-2011 as the economy was just starting to recover. If record high oil prices are going to accompany even modest periods of economic growth, then Keynesian stimulus per se isn't going to help us.

Maybe what's needed is tightly directed Keynesian stimulus - stimulus aimed squarely at producing an alternative energy industrial infrastructure and at making homes and businesses and transportation more energy efficient.

But if China is thrown into the mix, and we also have to contend with China's capture of the world's manufacturing capacity - it now has industrial momentum somewhat comparable to that of the U.S. circa 1946 - then how will we make our brand new alternative energy infrastructure competitive? China is massively expanding its own energy infrastructure.

Will China's economic growth and industrial/manufacturing momentum render any attempt at an alternative energy New Deal ineffective - something that would just leave us with a larger public debt overhang and make us even less competitive relative to Asia.

I don't know. If it were me. If I were the absolute dictator of the U.S. today, I would roll the dice on the alternative energy/energy efficiency New Deal. I would double our national debt to 200% of GDP to make this happen.

 

The question should be "why aren't jobs being created," not "why isn't the economy growing?"

GDP growth is an abstract, imperfect measure of the economy. Bad things are counted towards GDP, good things are not counted towards GDP. Several economists have been trying to push alternative measures for years, and they're probably going to gain momentum again soon.

 

Yeah. The two are interrelated of course. Stagnant or no growth means stagnant or no job growth. If we begin to see more robust GDP growth, the question of course becomes - is it the right kind of growth, and we have to ask not just whether we're creating jobs but whether we're creating the right kind of jobs.

 

How are US consumer confidence indicies looking?

ES

 

They're looking like the U.S. consumer has completely capitulated. They look like part of a generational shift in consumer attitudes (reflecting of course consumer resources). Not only do consumers have to continue the process of deleveraging for another 5-10 years, but they also have to boost savings to reflect likely diminishing returns in retirement investments not to mention the possibility that Republicans will try to pull the rug out from under Social Security.

 

The internet.

 

Hasn't Germany's economy been growing?