By Dan Calabrese ——Bio and Archives--January 3, 2014
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A careful look at American history by Michael Bordo of Rutgers and Joseph Haubrich of the Cleveland Federal Reserve Bank has blown holes in the argument. Recoveries from deep recessions with financial crises have been stronger, not weaker, than recoveries following shallower recessions. These strong recoveries average about 6% real GDP growth per year, compared to only 2% per year in this recovery. The current recovery should have been much stronger. Five years into a sluggish recovery, this explanation has worn ridiculously thin. The credit crunch and financial disruptions due to crisis have long since been resolved. Residential investment picked up more than two years ago, so the "weak housing market" excuse is gone. Yet the overall economy has failed to rebound strongly as it did so often in the past. At 52 months and counting, the recovery is already longer than the 33-month average of all U.S. recoveries. Yet the gap between real GDP and its potential based on population and productivity trends has yet to close appreciably. The fraction of the population employed is still below what it was at its start.Don't fret for the Obama Administration, though. They have a new excuse. It's your fault! Or more specifically, it's the fault of the private sector. They call this theory "secular stagnation" and it basically relies on the notion that investment became depressed 10 years ago (!) because technological innovation had played out (!) and people are saving too much and spending too little, and for this reason, only government spending could keep the economy afloat. These people really say this stuff. Taylor addresses this nonsense as well:
There are many problems with this neo-secular stagnation hypothesis. First, it implies that there should have been slack economic conditions and high unemployment in the five years before the crisis, even with the very low interest rates—especially in 2003-05—and the lax regulatory policy. But it was just the opposite. There were boom-like conditions, especially in residential investment, as demand for homes skyrocketed and housing price inflation jumped from around 7% per year from 2002-03 to near 14% in 2004-05 before busting in 2006-07. The unemployment rate got as low as 4.4%—well below the normal rate and not a sign of slack. Inflation was rising, not falling. During the years 2003-05, when the Fed's interest rate was too low, the annual inflation rate for the GDP price index doubled to 3.4% from 1.7%. Moreover, there is little direct evidence for a saving glut. During this recovery, the personal saving rate is well below what it was during the 1980s rapid recovery from a deep recession; 5.5% now versus 9.2% then. In my 2009 book on the crisis, "Getting Off Track," I examined the claim that there was a global savings glut and found evidence to the contrary: In the past decade global savings rates fell below what they were in the 1980s and 1990s. The U.S. has been running a current account deficit, which means national saving is below investment.What this really represents is the Obama Administration's determination to come up with any excuse, now matter how implausible, to avoid admitting its policies are responsible for the poor economy. This is partly, but not entirely, explained by the usual politician's impulse to deny he made a mistake. The bigger issue, though, is that the Obama Administration's economic policies have a broader political objective, which is to consolidate federal power in as many aspects of society as possible. That is what allows them to enlarge the permanent government-client class that will always vote Democrat because it depends on that government check to survive. Mitt Romney was right about the 47 percent, and the Obama Administration's goal is to make it a majority. That's how Democrats can stay in office forever. Of course, these policies are terrible for the economy, and in part that's the idea. They really don't want private-sector growth because that creates private-sector opportunities for people who will consequently not need to rely on the government for anything. There's a word for those people: Republicans, and the White House doesn't want any more of those than it absolutely has to put up with. So the White House needs to keep its big-spending, strong-regulation, high-tax, federal-intervention model in place as long as it can, and in order to do that it has to deny that it's killing economic growth. Thus, it will come up with any flimsy excuse it has to. It's a good thing we have people like John B. Taylor around to demonstrate just how flimsy these excuses are.
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