Karl Smith assembles some green shoots. If indeed there is a continuing (modest) recovery, what are we to make of it? I see a few options:
1. Government responded to the downturn with vigorous policy actions and brought recovery.
2. We were in a liquidity trap, but enough depreciation of capital and consumer durables is pulling us out of it. As marginal rates of return rise with depreciation, spending will go up.
3. The neo-Keynesian model applies, and enough nominally sticky decisions have been reset to undo most of the initial negative AD shock.
4. The economy had a strong positive technology shock.
5. A mix of default, savings, and refinancing have led to some balance sheet repair.
6. We had a strong positive AD shock through higher global demand for our exports.
7. Banks recapitalized through playing the spread and now they are lending again to marginal borrowers, thereby spurring economic activity.
8. Recalculation has proceeded apace.
Conditional on our economy being in the recovery stage (e.g., no pending eurozone implosion), I would assign most of the weight to #2 and #3 and #5, noting that #2 can operate in a liquidity trap but does not require it. I see a small bit of #4 and #7 and #8 apiece, and I don’t regard #1 and #6 as playing roles in the story, mostly because they are not true.
The New Old Keynesian bloggers tend to downplay the recent bits of good news. If a real recovery were shown to be taking root, would they invoke a large dose of #2?