What can we infer from an excessively slow U.S. recovery?

Martin Wolf covers some various detailed points, but I’ll simply say “not much,”  at least not for current political debates.  I’ve avoided covering this topic (which refuses to die) because I don’t think much is there.  The discussion is mostly politics.  There are not for instance conceptually dominant ways of organizing the data and deciding which episodes or which countries “count.”  I also believe that what is a “financial crisis” is not as well-defined as many people, on both sides of the debate, would like to believe.  On top of all that, I see a good deal of evidence for a downward shift in the underlying U.S. growth rate before the crisis, and arguably in part causing the crisis.

I’m hardly falling in line to praise Obama here.  I do think that the minimum wage hike and unemployment insurance extensions have contributed to the slow labor market recovery, without being the main stories.  Those points — whether or not you agree — should be and indeed can be argued for on their own grounds.  I think the health care bill is one of seventeen factors speeding up the polarization of U.S. labor markets and lowering the labor force participation rate, admittedly through prospective and forward-looking mechanisms.  I see at least half of ARRA as a big waste, but certainly it didn’t lower the published numbers for gdp growth and it almost certainly raised them in the short run.  Those are all points worth debating, or rejecting if they turn out not to hold up.  The cross-sectional macro story, presented at the current level of aggregation, just doesn’t generate that much information about regime performance one way or the other.


We are about to enter the next recession and still the only thing shovel-ready is the rhetoric.

.......and sarcasm. Mountains of it.

There is a difference between snark and the tears of a clown.

Pretty good throw down there from Martin Wolf, at least the US stuff.

Perspective people!

"The reader will see that Prof Taylor is quite right. The recovery from the recent crisis is far weaker than that from the previous systemic financial crisis. I am not disagreeing."

Yes, that's pretty accurate.

I think the question is-- if not for the Dot Com and Real Estate bubbles where would we have been at this point in time? I wonder if we're not so much in a recession as regressing back to where we would have been without the illusory growth spurred by the bubbles. The billions pumped into the economy in the form of home equity loans vanished virtually over night and that money is not coming back anytime soon. Let's face it, the bill for years of living in a fantasy economy has come due and we are going to be paying for it for a long time.

Leverage amplifies shocks on the way up and on the way down. The windup was crucial to setting up the sharp decline.

This debate may not be well defined (reminds of the austerity talk) but that's all the more reason to jump into the fray. There's no 'right' way to look at the macro data so you have to examine many angles...search for a few common threads. In addition to trying to define effectiveness it's worth considering whether the financial crisis left deep wounds (need more stimulus) or compromised our self healing (need different kinds of stimulus). I've done some work on the stimlus to households that suggests it may have been less effective at boosting spending than in prior recessions. Of course if stimulus helps households rebuild their balance sheets maybe that is effective in some sense.

The capital gains tax rate cut in 1997 created real wealth through pump and dump in the dot.bomb bubble - look at the wealth created overnight in the pets.com IPO.

The capital gains tax rate cut really worked well because without the absolute certainty of real wealth at low tax rates, the dot.bomb economy would not have resulted and millions in Silicon valley would have been forced to work at really making something of utility.

The re-invigoration of capital gains tax rates cuts couple with deregulation of lending to remove the requirement loans can be repaid restored the economies ability to create real wealth by pump and dump of real estate and the securities that allowed the pump and dump to create real wealth.

What is needed today are tax rebates for capital gains to restore the wealth creation of pump and dump economic activity. Asset churn creates real wealth.

If the "financial crisis" thing is mostly "politics," then I feel bad about missing what for Ken Rogoff must have been a truly dramatic transformation to become an Obama-koolaid-drinking liberal.

The dollar is being rejected as the world's reserve currency.

Being supplanted by?

In favor of what?

Unless you are a goldbug, I can't think of what this new reserve currency would be.

There is no need for a reserve currency.

Countries trade with their own currencies instead of intermediating with the USD.

It's not a flight to, it's an escape from ...

The world is rejecting the dollar (Europe, Far- & Mid-East), perhapsNOT because they have something better in mind, but because the benefits are being outweighed but the costs and dangers.

Whatever it is the next reserve will bring new problems ... could be a SDR's, a basket of ???
It wouldn't surprise me if gold was involved, f.eks. gold reserves allowed to float freely against a currency .. the way the Euro is structured now (not a gold standard, much better). The Euro will survive better because it is designed as a bad store of value. People won't trust it, or expect it to do what it cannot.

More worryingly, maybe for many years, we won't have a stable reserve at all.

12–13 T dollars outside the U.S. is really f*cking dangerous.

How many of the last recessions saw housing as a leading us out of the recession.

Didn't happen this time, though, did it.

So, Tyler, I've noticed you criticize a lot, and are really good for coming up with reasons that a certain policy, or Krugman column, is wrong/won't work/incomplete/etc. Is there anything thoery/model/rain dance you would support as being effective for resolving the macro economic issues before us, or are you just content telling people that they're zero marginal product workers, and are victims of a great stagnation beyond any of our control?

I believe that the MR position is that there is really not a lot to be done, as the economy is limited primarily by a lack of financial trust which prevents growth-spurring investments from being made. The prescription for this, unfortunately, time, although we can see it starting to come back somewhat over the course of Obama's first term. Also, improved Fed policy would help, although MR seems to not think that the Fed has been suboptimal by a huge amount. Correct me if I'm wrong.

Don't agree with everything you said, but I'd also be interested in TC's recs.

Two thoughts: 'be careful what you wish for' and 'comparative advantage.'

On the first, read this example of a policy statement here: http://marginalrevolution.com/marginalrevolution/2012/07/the-best-argument-for-a-more-expansionary-monetary-policy.html Is that really what you want? On the second, I can refer you to a list of smart economists right, left, and center who put up policy proposals on their blogs regularly. So the person who picks apart other's proposals in all directions is valuable. It's rare for a policy to be dreamed up and executed in its original form. There's often a lot of discussion and compromise. What a service to help people identify the flaws in the policy so they get chucked at compromise time. Ok, that's idealized but you get the point of comparative advantage in critique.

So, it's been Tyler's rain dance that caused Sandy to turn sharply west toward GMU! Hah. I knew it. He really should have been dancing earlier this year to get rain to the mid-west. His timing is pretty bad.

So, in short Taylor's argument is but for Obama's actions we would have had a stronger recovery. Just look at all the evidence! And, the other side of the argument really should have been (and Wolff pretty much says it: "In sum, we have no reason to regard the performance of the US economy under President Obama as poor, given the conditions he inherited.") but for the policies of the Bush administration there would have been no economic collapse. Therefore, electing Romney means a return to the failed Republican policies.

Yup, pretty political. But why doesn't Tyler also mention the auto company bailouts and the bank bailouts? I guess they had nothing to do with the weak recovery. Huh.

And I agree. I, too, would like to hear Tyler's theory/model/rain dance to resolve the economic issues before us. In the political world we only have two bad alternatives: stay the course or same old same old. And the level of discussion is almost totally just name calling without substance. Why do such smart people act so ignorantly?

Wow. My spelling and grammar are terrible when I'm hungry, and a hurricane is barreling down on me.

Overall, this is a very important topic as it starting to look like the US and Europe have their own way of 'Turning Japanese.' (Basically that a developed booming economy basically stagnant after the bubbles burst and government spending & monetary poicy has modest effects. Also because of the staganant growth de-population starts occurring.) Are we simply in global economy that has a labor and savings glut that it will inhibit the growth? Oddly enough, I believe the middle class dream of two hard driving parents with two kids, cars, and big house crashed and a lot of Americans have modified their expectations. This diminished economic expectations of the family is now trickling up to corporate American.

Yet we do not appear to lack the productive capacity to create all that is required to provide said expectations. Odd isn't it.

An explanation whereby there simply is not enough of a certain something, let's call it middleclassness, whatever it is, would make sense on a global scale if now other countries possess some amount of it and production of it cannot be scaled up (quickly enough to meet demand at least). So what the heck is "it" and how can we make more as soon as possible? And, no, lower taxes are not sufficient, especially given current investment shortfalls and government indebtedness as compared to historic norms.

Much of Martin Wolf’s argument finds its basis in is an old argument: things would have been worse if XYZ had not been deployed during the Great Depression. In essence, Wolf’s argument is that Keynesian policy works or at the least sort of works. Sounds good until you study the great depression. Many say the policies deployed extended the depression e.g. Hayek. Hayek went on, in real time during the depression in 1938, to point out that fiscal policies have limits and hence monetary policy has limits. Contemporary books outline the elongation of the Great Depression: New Deal or Raw Deal by Folsom, The Forgotten Man by Shlaes and FDR’s Folly by Powell.

In particular, the “it will be different this time” Keynesian jump start theory [that supposedly sort of, kind of works] always comes with the lovely diagram of the "bucket". The bucket represents demand. The bucket's content is household, business, and government demand for goods and services. A recession is a bucket that is not full to the brim. The bucket is no longer full as the demand components of households and businesses has shrunk and hence its (according to Keynesians) the government's responsibility to increase its expenditures (increase its component of the bucket) in order to bring the bucket back to full.

Seems like common sense. However, the increased government deficit expenditure that attempts to fill the bucket is really draining the bucket simultaneously. Its counterintuitive. As the government increases deficit spending, private capital formation leaks out of the bucket (crowded out). Hence you try and try to fill the bucket but it remains below the brim.

Once you stop filling the bucket with government deficit spending, you now must pay for the deficit spending. Hence Keynesians raise taxes. The taxes then create another leak in the bucket as disposable income shrinks causing the demand for goods and services by consumers and businesses to shrink. Hence the bucket goes right back to the level that you began with before you started this wasted exercise.

Keynesians should wear the bucket over their heads.


Today, I began an exercise routine at a university gym because it is getting cold outside. So, I grabbed my old Ipod Touch, went off to the gym, and since I hadn't loaded anything new on it since 2010, I listened to some economic lectures from 2010. You should do the same to understand how far we came, and how bad things looked.

One of the lectures was by Robert Schiller. Speaking just before the stimulus program was , he pointed out the stock market had declined by 55%, second only to the 80% decline in the Great Depression. He predicted a dramatic drop in housing prices and increases in foreclosure. He stated that Obama's plan was not big enough, and placed too much emphasis on tax cuts (1/3 of the program). He agreed that we were headed to 12-14% unemployment, and more. He said Obama should do more, because more was required, and that he did not have a program large enough to address housing refinancing.

Go back and do some reading from the period. You lived through it. So did other readers.

Today in the gym ranks up there with the day the House failed to pass the Tarp bill. I was at an expensive California golf course bar watching the live TV vote on the Tarp billwhile the bar room audience of wealthy people were hooting about how Tarp should be killed. As the votes got closer, the room became silent when the ticker of the NYSE was played under the vote count....crashing.....and the bar room became silent. Some of the old guys shuffled in their seats, put the money on the bar, and walked off. In silence.


Maybe TARP was just one government program's thumb in the crack in the dike caused by some other failure, a kind of fiscal/monetary jolt that did nothing other than throw a dash of Scotch into the punch bowl. So "It should pass" is conditional on the screwup that created the "need" for it, not that a falling Wall Street necessarily kills us nor that bailing them out necessarily helped us.

Life is choices, right. So, had it not been done....

Had it not been done, you don't know what would have happened.

And they can't do smart things over decades, I doubt they did something smart in an afternoon. If it actually "worked" then it was pure luck.

There is in fact a school of thought that says outright defaults, bankruptcies and clearing the books would speed recovery faster than these vampire zombies that they created that continue siphon the blood out of the system.

I understand the part where if the whole system is going down you don't punish everyone. But if that is what happened, then people should stop wanting people locked up.

And what really happened is the system went down due to the government screwups: money mismanagement, Mark-to-Market accounting changes at the peak of a bubble, ad hoc approach to bailouts then letting Lehman collapse in chaos, injections of uncertainty, more money mismanagement, more injections of uncertainty.

So, after all the screwups then their best idea was to indebt us so they could throw a pile of money at the banks, while at the same time trying to bust the banks. I'm not surprised that you can take money from some people and prop up other people with it. It's just not a win.


TARP-proper (not the auto bailout) was, IMO, the most obvious case for US government intervention in my lifetime. At the time, there was an historic crisis of confidence, and an historic opportunity for credibility to wade into the fray and make some moola. That's what Uncle Sam did. As a taxpayer, I say thank you.

The running 12-figure subsidies to banks in the years since TARP via Fed policy- that's a different story.

+ 700 billion, well put

Although I felt the auto bailout was also a very good and well executed idea. Not as good as TARP but still.

Professor Cowen, what makes you think the minimum wage and Unemployment extensions have not played a key role in restricting labor markets?

What jobs have people been restricted from taking? Specifically are there lots of firms looking to take on additional employees if only they could pay less than prevailing/mandated wages, and if so in what sectors and why?

Both measures raise the cost of employing someone. Directly in the case of the minimum wage, and indirectly with extended unemployment benefits.

It's a de facto. They (that is, they themselves) claim wage stickiness is a problem. Then they enact wage stickiness.

it's not that it has to be a huge issue any more than a psychotics delusions are big in reality.

Shall we count the ads in the "hypothetical help wanted" section?

Key to the decline in the gross is the decline in fertility since Roe vs. Wade. Since a typical individual's peak earning years are between the age of 40 and 60, you should see a large decline in national income growth phasing in around 40 years after the fall in births, just as in Japan after the passage of the postwar eugenics law. While immigrant labor could make up some of the difference, the failure of the reform effort in 2006 lead many immigrants to give up on the US. Gross investment to expand the physical plant merely duplicating past patterns is no longer needed if the labor force stops growing. A hint that this is part of the story may be that home prices fell greatly in areas where immigration was greatest.

It's rare that I agree so completely with a TC post. (I'm really more of an AT guy...) But this one is spot-on. Kudos.


You "see at least half of ARRA as a big waste" but I have never seen you offer any good evidence of anything remotely like this.

If you have minute, please take look at wikipedias line item break down of the ARRA and show us how you get to 50% "big waste" I could see 15% MAYBE, but most of the ARRA is: tax cuts, infrastructure that mostly would have happened anyway (when costs were higher!!!) and efficiency programs. I'm detecting your blinders here maybe "waste" just means things you dislike on purely ideological grounds though.


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