The Recovery is Slow by Historical Standards. What's to Blame? UPDATED: Should We Blame Tight Monetary Policy?
John Merline at Investors Business writes up the sluggish recovery and its explainerers:
The 1957-58, 1973-74 and 1981-82 recessions were the sharpest post-war slumps until the Great Recession. From those lows, the economy rose 15%, 18.5% and 19.6% over the next 11 quarters, respectively, vs. just 6.8% for the Obama recovery….
Some on the left blame the lack of adequate stimulus for the recovery's tepid pace. Former Obama economic adviser Larry Summers this week called for still more borrowing.
Those on the right blame Obama's own policies for slowing the recovery down, pointing to the substantial increase in the national debt, the growth of costly new regulations, the threat of new taxes, the impending ObamaCare mandates, and a general sense of uncertainty in the business community.
Gentle reader, do you think lack of counter-cyclical spending is mostly to blame for the slow recovery? Or is that very spending (read: borrowing), compounded by regulatory and political uncertainty ushered in by a "transformative" health plan, a massive financial-regulation bill, the inability to pass a budget and create a clear path on tax rates a larger cause here?
Update (1.15 pm): Over at Forbes.com, Tim Lee suggests that the real cause of the slow recovery is tight monetary policy. From his post, which you should definitely check out:
Standard economic theory says that if inflation is projected to be below the Fed's 2 percent target and unemployment is way above the economy's natural rate of 4 or 5 percent, that's a sign monetary policy is too tight.
Too-tight monetary policy would produce exactly the kind of slow recovery we're currently experiencing. But a lot of people have fallen into the trap Milton Friedman warned us about: of taking low interest rates as a sign of loose money. In reality, low interest rates can be a sign of extremely tight money, as with Japan over the last two decades….
The market monetarist position doesn't fit neatly in either of these conventional narratives. Because we see the recession as primarily a monetary phenomenon, most of us aren't enthusiastic about fiscal stimulus beloved by many on the left. But our view also isn't intuitively appealing to conservatives who tend to see "too much" government as the cause of all economic problems.
I agree with Lee, who chides me for falling into a framework that supports Dem/Rep bashing, that monetary policy is a huge part of recovery economics (that's one of the reasons I didn't say above that there's only two possible causes). And recession economics, too!
From a Friedmanite monetarist POV, we're in exactly the sort of situation in which you'd want the Fed to be opening up the money supply even more than it's been trying to for what seems like forever anyway (hello, Greenspan!). The Fed hasn't been particularly tight-fisted for a very long time (though the few-years-old turn to paying interest on reserves, which gives banks a reason to on money, seems even more stupid with every passing day). I agree with the general historical argument (made by Friedman and Christina Romer, among others) that monetary stimulus was responsible for countering the effects of the Depression in the mid-'30s (itself a result in part from a post-Crash tightening) and that re-tightening the supply back then was a mistake. Lee suggests that the effective money supply remains tight based on the lack of economic growth both here and in Japan. That presumes that the right monetary theory is the solution and that the Fed just hasn't gone big enough yet. (Which many are predicting it will do eventually.) How much bigger does it have to go, though? What if it's true that the "Fed has run out of viable policy options," as Lee's Cato colleague Gerald O'Driscoll contends?
I think Lee is right to insist that monetary policy be included in all discussions of economic cycles (especially from a libertarian perspective). And I agree that looser money, in concert with other policies, is part of the sort of austerity that has worked to reduce debt-to-GDP ratios in the past and help economies gear up.
But here's something else worth thinking about as we await word of whether Helicopter Ben Bernanke will drop yet another "big money bomb": Even if you believe in Keynesian policy (and I don't), fiscal stimulus isn't really going to work if the government persistently runs debts and targets generally useless aspects of the economy. That is, the government can't jumpstart the economy if it's already worn out the starter over years of over-grinding it. I think something similar might be true with monetarist policy. What if the past couple of decades of relatively loose money has made it virtually impossible for monetarist moves to work?
Arguably the single-greatest conceit in economic thinking is its monomania, the idea that a single factor explains everything (I'm not saying Lee believes that, by the way). Clearly, whatever Treasury and the Fed and other parts of the government are doing ain't working (again, I come back to the humongous amount of uncertainty regarding tax, regulatory, and economic policy - that's gotta freeze up loads of activity; and don't get me started on debt overhangs, either). The non-responsiveness of the economy might be because the various policies are at cross-purposes at one another or that all the policies are in error, or some mix. And it might because the economy is screwed for reasons that we don't even recognize currently. But it's almost certainly more than one thing, which suggests strongly too that the solution will involve lots of other factors, too.
