Mark Thoma Muses on the Pace of Recovery and the Bump in Inventories
Mark Thoma:
Economist's View: "Reading the Bump in Inventories": David Altig says he isn't too worried about inventory accumulation in the fourth quarter of last year translating into slower growth in the first part of this year….
For me the big uncertainties right now are the pace of the recovery (will it remain plodding and take years or will we see an accelerattion in activity?), how much trouble we'll encounter along the way -- it's unlikely the return to full employment will come without setbacks of some sort -- whether the setbacks will be temporary blips or longer lived problems, and how policymakers react when the inevitable trouble hits.
Policymakers will have a lot to do with how those uncertainites play out. Monetary and fiscal authorities could push a faster recovery with the appropriate policies, but while the Fed seems more inclined in this direction than fiscal authorities, I don't expect anything substantial from either. More likely is that policies will be reversed before the economy is ready for it. If monetary and fiscal authorities withdraw support for the economy too soon through austerity measures designed to balance the budget and interest rate increases out of fear of inflation, the recovery will be delayed. In addition, there will be a tendency for policymakers to minimize any trouble we encounter and continue with the assumption that greener pastures are just around the corner. This avoids difficult policy decisions, but misplaced optimism of the type we've seen throughout the crisis puts policymakers behind the curve when we encounter difficulties that are persistent rather than blips, and the delayed policy response hampers our recovery efforts. The risks of too much policy and too little are not symmetric. If policymakers make a mistake, it ought to be in the direction of too much support for the economy for too long rather than too little support that ends early. The reality is that policy support has been too little all along, and that's unlikely to change, but that doesn't mean it also has to be reversed too soon as well.
