Here’s the nub of Edward C. Prescott and Lee E. Ohanian’s op-ed in the Wall Street Journal on the economy:
It’s clear the recovery ended in 2014 because the two hallmarks of recovery—investment’s share of gross domestic product and labor input relative to the adult population—stopped increasing. This left a large gap between actual output and the output level that would have occurred had the economy recovered to its prerecession growth path. According to our calculations, the U.S. cumulatively lost about $18 trillion in income and output between 2007 and 2016. Everything suggested this shortfall would persist or even grow.
Yet economic performance began to improve beginning in the first quarter of 2017. Real GDP growth accelerated to about 2.7% between the end of 2016 and the second quarter of 2018, up from about 2% between 2014 and the end of 2016. The share of GDP devoted to nonresidential business investment rose to a historic high.
The best measure of labor input—the total number of market hours worked divided by the 16-and-older population—is growing faster than in 2014-16, and is now close to its all-time high. This is all the more impressive since the growth rate of the working-age population is slowing. Perhaps the most exciting aspect of the current economy: The emergence of better job opportunities has reduced the number of people on disability. This has led the Social Security Administration to reverse its previous warning that the disability system would become insolvent as soon as 2023.
U.S. economic performance is the strongest in years. One policy driving this turnaround is the substantially lower corporate-tax rate, which has made the U.S. more competitive with other countries. Regulatory changes—such as the partial rollback of Dodd-Frank and new leadership within the Consumer Financial Protection Bureau—also have proved helpful, particularly for small businesses, which are benefiting from lower record-keeping and compliance costs. Meanwhile, the number of regulatory pages in the Federal Register has been cut by a third since President Obama’s last year in office. That’s a major reason the National Federation of Independent Business reports that more small-business owners are hiring than ever. They’re also increasingly optimistic about the future of the U.S. economy.
As the two hallmarks of recovery are still rising, the economy likely has not reached its new, higher growth path. This means that the U.S. can expect above-normal growth in the coming months, possibly even years.
I’m pretty Keynesian in my views but I was also skeptical about the utility of Keynesian pump-priming in 2009 under the circumstances that prevailed then. The 2000s were not like the 1920s. It was a bubble economy. A Keynesian strategy presupposes a difference between aggregate product and potential product. A bubble economy meant a lot less potential product. The reduced aggregate product was just gone. What we needed was a major course correction in our policies. We didn’t get it.
We still need a lot more course correction. Regulations must be much more pragmatic. If Canada can require that regulations be cost-effective so can we. When regulations or policy changes cause a loss of jobs, particularly highly localized job loss, they should be accompanied by measures to remediate their negative effects or not implemented.
We also need more domestic business investment. When more personal consumption results in more investment in China, India, or the Philippines, it does us little good. How do we accomplish that? I have no idea.
We need to revive our manufacturing sector and basic production. We will still remain much more a service economy than we were in 1950 but a service economy in which the service jobs require the government to pay for them has a basic problem.
“We need to revive our manufacturing sector and basic production.”
You need to support Donald Trump, and to vote for him in 2020.
[…] The 2000s were not like the 1920s. It was a bubble economy. […]
They were exactly alike. In the 1920’s, there was a stock market bubble. People were leveraging every asset to create credit, and this caused the stock prices to rise. People were buying on margin, and commercial banks were lending to investment banks.
In the 2000’s, it was housing. People were leveraging every asset to create credit, and this caused the housing prices to rise. People were buying on margin, and commercial banks were lending to investment banks.
The stock market crash of 1929 was the same as the housing bubble bursting. Many people had financed the house on margin, and existing homeowners were leveraging their house equity into a line-of-credit. Actually, line-of-debt would be more correct.
When the stock market or housing markets began to collapse, there were no buyers. With each margin call, the leveraged asset had to be sold to meet the margin call, and with each sell off round, the prices dropped causing another round of margin call/asset sell off.
In both cases, it was assumed that neither stock nor housing prices could deflate. Both cases resulted in a staggering amount of money being destroyed, and it took over a decade to recover. (In the 1930’s, the Dust Bowl did not help.)
I would like to think that the Trump economy is booming, but I do not suddenly trust the numbers because there is a President I mostly support. As far as I know, President Trump’s unemployment rate is calculated the same as President Obama’s unemployment rate.
I think there was a big difference. During the housing bubble one narrow class of assets, housing, were enormously overvalued. During the 1920s while stocks may have been overvalued the underlying productive economy wasn’t in a bubble. Its productive capacity remained in place until structural changes caused permanent reductions in aggregate product. That was the world that Keynes was addressing.
When the housing bubble collapsed, houses lost value. Autos, clothing, food, and so on didn’t lose value.
During the 2000’s, financial products were overvalued, and in a financialized economy, financial products are assets to be leveraged. Housing prices were not the problem. The problem were the various financial products that were overleveraged using inflated assets (houses).
Most of the alphabet soup of financial instruments have morphed into different letters, and I suspect that they are still overleveraged. Off the top of my head, MBS, CDS, SIV are a few.
Had TARP been used to shore-up mortgages, the financial collapse might have been less severe, but there would still have been pain. Instead TARP was used to cover the financial losses of the ‘too big to fail’ by funnelling the money through AIG.
In the 1920’s, the US manufactured tangible goods. In the 2000’s, the US manufactured financial goods, and much of those goods were used to manufacture more financial goods. It should be noted that these goods are backed or assumed to be backed by the Fed and the US government by extension.
Up until the financial collapse, automakers were selling loans, and the cars they produced were the means to sell a loan. The same business model is used for student loans.
Awful lot to fisk in the piece, but of concern and it gets little attention, is that this is a deficit financed increase in economic activity. It is almost unprecedented to do this in a strong economy. You have to ask when we plan to pay off our debt. If we aren’t going to do it when the economy is strong, when will we do it?
Just on regulations, the people who track them keep saying that very few regulations have actually changed. You can’t just sing them away. You need to show that overturning them (many) will not cause harm. Also, remember the Mercatus Center (libertarian, very strong anti-government group) showing that current regulations don’t negatively affect the economy.
Steve