The Imaginary Recovery

If you’re looking for something else to be depressed about this post by Jeffrey Snider at RealClearMarkets on the state of the economy and what that portends for Federal Reserve policy is a pretty good choice. It’s a bit hard to excerpt but here’s an interesting snippet:

In that respect, the closing of the “output gap”, the academic calculation of “slack”, is highly misleading. Again, far be it for the FOMC to point out and emphasize the true reason for that outcome as it would at least muddy the preferred recovery narrative if not end it entirely. Larry Summers perhaps put it best earlier this year when he stated, with appropriate frankness,

“The United States is now about 10 percent below potential, as it was estimated in 2007. In so far as the output gap has closed, it is not because we have gotten closer to what we thought potential was. It is because we have revised downwards our assessment of the economy’s potential. That 10 percent potential represents about $20,000 per American family.”

To be even more blunt, the reason that there may be less slack now is not because the economy has finally found its recovery but rather because it may never do so at all. You can quibble with the mathematic construction of the measure or its theoretical basis, but what is important here is that the very people that believe in these sorts of things are now forsaken by their very creations. If there is actually a reduced level of slack in the economy right now, it is only because the US economy has permanently shrunk via the Great Recession.

Thus explains the great “mystery” about why the numbers so differ with what people feel and say about the matter. This cannot be overstated by hyperbole, as it essentially confirms what many of us have been saying for years and years; that the Great Recession was no cycle but rather a permanent rift in economic function that will alter our history and social standing for a long, long time (depending on how it is ultimately dealt with). Again, I make no claims about the figures or even the concept of “slack” except to point out that orthodox economists have now endorsed an idea that disproves a great deal of their own theoretical foundation.

The way I prefer to look at it is that the increases in productive capacity that economists were figuring on were predicated on productive capacity that never existed to begin with. When viewed that way growth has been very slow not just for the last eight years but for the last fifteen years. The purchasing and wage commitments that were made during the period of imaginary growth are with us still, holding us back. That’s what state and local governments and taxpayers are running into.

What should be clear from Mr. Snider’s post is that monetary policy won’t save us and we should be looking elsewhere. As is a recurring theme on this blog, our economic problems are the foreseeable outcomes of about a half century now of very bad policies. To change the outcomes we must change the policies.

4 comments… add one
  • jan Link

    When I read this post I immediately thought of some friends of our’s who are trying to get an old hotel in town up and running. So far they have been concentrating on having a fully functioning bar and dinning room. However, due to the liquor license expiring under the previous ownership, they have had to deal with it’s reinstatement, which means going through all the governmental processes. So far, it’s been a nightmare of inefficiency, bad information — even being told to drive to a San Francisco office which was defunct and moved to Sacramento. When informed their paperwork is complete, they are then told it’s not — again after a long drive to governmental offices, going through check lists that keep mutating into expanded check lists.

    In the meantime, they have 54 employees on payroll with a bar serving make-believe drinks. The owners are getting desperate as they don’t want to let any staff go, as some quit jobs in order to be a part of the hotel’s opening. However, as one owner put it, “Government doesn’t care about us making it or not.” She added they are on the breaking point.

    Sometimes one anecdotal experience can represent a microcosm of a larger problem. IMO, this story does just that. It demonstrates how oppressive bureaucratic intervention, conflicting rules and regs negate the zeal and financial risk going hand-in-hand with most entrepreneurial ventures. Maybe that’s why so few people dare start or expand businesses anymore. And, maybe these are the real side effects of a large, centralized government making short-sighted politicized policies for the sake of cementing in an ideology rather than creating economic growth

  • ... Link

    If you’re looking for something else to be depressed about ….

    No thank you! Found out I have a $750 problem with the car this morning … that I can reasonably ignore! Woo hoo! The only problem is the Check Engine light will remain on constantly, meaning I’ll have to be very careful to not let another problem slip in in the meantime.

  • Cstanley Link

    @…
    I lived with a similar problem for a couple of years but in this case the check engine light came on intermittently. It would stay off for months at a time but consistently reappeared just in time for the annual inspection (registration here requires emissions testing) so that we had to do repairs in order to pass. Grrr.

  • Andy Link

    Well, I’m a rube when it comes to highfalutin economics, but what I do know is that I bought a house in Florida in 2002 for $150k. We put $50k into it and when I went to sell it in 2006-2007 all the experts said it was worth $500k. Although I unloaded it several years ago (taking a major financial loss along the way), I keep watch and I’m waiting for it to reach its potential value which is, obviously, $500k. Zillow estimates the current value at $173k, so clearly the market is operating well below its potential…..

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