Will Future Economists and Historians Judge Obama/Bernanke/Boehner/McConnell More Harshly than They Judge Hoover?
They will certainly judge them much more harshly than they judge Roosevelt.
Ryan Avent:
America's labour market: Bringing back those missing millions: [DeLong's conclusion] is disturbing, of course, but it immediately scales down the size of the problem. The gap [between current and potential labor-force participation] is not 5m, as a look at the CBO's projections might lead one to assume, but more like 1m-2m. Not coincidentally, the number of Americans on disability insurance—which has come to function as a sort of loose, but more permanent form of unemployment insurance—is up 1.6m from 2007. That, I think, it quite close to the full extent of the long-term unemployment problem. Again, that's a problem, but it's not a catastrophe. Most of the employment gap is susceptible to faster growth. Many of those now on unemployment insurance would have soon left the labour force anyway through retirement. Others could be brought back through a combination of disability-insurance reform and a tight labour market.
What about that tight labour market? On Friday, I tweeted that there was no structural unemployment in America that couldn't be eliminated in a late 1990s-style labour market. This prompted a wave a responses from individuals arguing that if America has to count on a once-in-a-lifetime internet boom for such growth, then it rightly should be called structural. This, however, confuses the macro with the micro. There were a number of microeconomic trends underway, including the first stirrings of the internet economy, that made the late 1990s a prosperous era. What made the period a job-rich time was accommodative Fed policy; nominal GDP growth averaged well above 6% from 1997 to 2000. After falling about 2.5% in 2009, by contrast, it rose just over 4% in 2010 and just below 4% in 2011. That's below trend at a time in which the economy ought to be catching up to where it previously was.
The Fed allowed such rapid growth in the late 1990s because unusual macro circumstances at the time placed substantial downward pressure on broad prices: oil was dirt cheap, a strong dollar was reducing import costs, and China was a net disinflationary force….
[L]et's be clear; the primary evidence for permanent loss of potential is the slow recovery in the size of the labour force, which would appear to be largely due to cyclical variation. We are not seeing a surge in labour costs, or prices generally, indicating that the economy is actually running up against capacity constraints…. the Fed… has been happy to accept at- or below-trend growth, despite the fact that the large remaining output gap has quickly translated shocks into worrisome disinflationary pressure. Now the public is increasingly willing to read Fed failure as a loss of potential. If the Fed comes to agree, it may begin to fear that it has less room to boost the economy, it may consequently boost the economy less, and it may therefore ensure that the output gap persists until it does indeed become permanent.
This is self-induced paralysis: the fear that trying to do things to fix current problems will generate consequences worse than the present problems, all evidence to the contrary. It's frustrating—galling, even—though I suppose at this point we shouldn't find it surprising.
One last point: a country to which tens of millions of people around the world—including highly skilled, ambitious, educated workers—would gladly move is one that never has to worry about slowing labour force growth. If we're going to diagnose America's ills, let's diagnose them correctly.
