Structural Problems With the Economy

At the New York Times Tyler Cowen points out something that should be obvious to all but the most tenaciously partisan—the problems with the U. S. economy aren’t ordinary cyclical problems any more:

It is hard to avoid the feeling that our current economic problems are more than just a cyclical downturn. We know that the economy has gone through some bad times. But what exactly are we experiencing?

One relatively optimistic view is that observed deficiencies — like slow growth in real wages and the overall economy, persistently low interest rates and low levels of labor participation — are merely temporary. In this view, these problems will dwindle after manageable problems like high levels of public or household debt have been reduced.

Another commonly heard view is that we made the mistake of letting the last recession linger too long, allowing some of its features to became entrenched. That analysis suggests that if we correct past policy errors, whatever they may have been, an underlying normality will re-emerge.

Both of those proposals—the deficiencies are temporary and they’ve the consequence of mishandling the late recession—are nonsense. We’ve had most of the problems for decades. Just as a thin wash of colored pigment will bring up even small hills and valleys on a white-painted surface, so the late recession has highlighted the problems we’ve been struggling with since the George H. W. Bush Administration (at least). New businesses are not being created at the rate they used to. New jobs are not being created at the rate they used to. Economic surplus overwhelmingly goes to producers. The gains from trade accrue to the wealthiest as do increases in income and wealth.

If you’ve been reading this blog for a while you might have some ideas on how that might have happened but if you’re just passing by, that might come to you as a bolt from the blue.

Over at OTB the very first comment on Doug’s post on this same article takes time out to pat President Obama on the back (something he hardly needs help with). If you believe that federal stimulus ended recession in 2009 or prevented a second recession from starting in that year, you necessarily believe that the measures taken during the George W. Bush Administration did the trick. Money did not begin being disbursed under the “stimulus package”, the America Recovery and Reinvestment Act, until later. What, then, did the ARRA accomplish?

I think it’s been sufficiently documented that it didn’t do much, at least not the “infrastructure spending” component of it. For one thing, as the president has acknowledged, there’s no such thing as a “shovel-ready project”. Secondly, most of the projects had already been approved at the state and local level. There wasn’t a great deal of stimulus provided. They just moved money from one pocket to another.

We need serious changes to our economy. That’s the long and the short of it. We import too much of what we consume. The businesses that have the cash (or credit) to invest are not sufficiently motivated to invest in the domestic economy. The labor market is too slack. Change those and you might see a recovery worthy of the name but I wouldn’t get my hopes up.