Conventional wisdom regarding recessions says that the severity of a recession determines the intensity of the recovery. Friedman famously illustrated this theory by comparing the economy to an elastic band, the harder you pull back the harder the band is going to snap back. Since the end of the recession in 2009 though, growth has averaged about 2.2% annually. The average has been about 4.2% for the last seven recoveries. So, what is different now? An article from the Economist provides interesting answers to this question.
The first is that there are underlying trends that have to do with recovery and that these trends were slowing before the crisis hit. These trends are supply of workers, capital, and technology. Ultimately this is potential growth. One paper published in 2012 states that 80% of the shortfall in growth can be accounted for by slower potential.
The article provides some explanations for the slowing of America’s potential. One reason is that since the end of 2007 the population who can be in the labor force increased by 11.6 million while the actual amount of people who joined the labor force during this time was 1.6 million. This dragged the rate of people actually in the labor force from 66% to 63.5% (lowest in 30 years). The article also argues that the reason for a decrease in TFP (total-factor productivity) is because the “productivity-enhancing impact of the internet has begun to wear off.” They don’t have any numbers supporting this claim, but it would be interesting to see more research done on this.
Yea I think we have to worry about the increasing number of baby boomers retiring over the next decade which will significantly decrease our labor force. There is some untapped potential in productivity enhancement with new computers that are being made that will be able to increase computational power. Computational power has increased steadily since the 1970s and I think there is some possibility for productivity growth with more powerful computers.
ReplyDeleteThe article linked above mentions that "consumers are too much in debt" and "businesses cannot or will not spend." For a country to grow, people need to spend to stimulate the economy. It may not occur in a way that would bring about greater economic recovery, however, because consumers and businesses alike are all wary of spending as a result of the recession. I wonder how much of this slow recovery is due to the fact that people are wary of too much spending and thus are not stimulating the economy enough. It may require a few more years, or even more, to see if this recovery speeds up as businesses gain more confidence in the stability of the economy.
ReplyDeleteI agree with Lizzy, consumers need to spend money for businesses to be successful. If consumers are not spending money then businesses will fall through and recession will worsen as unemployment increases. The issue today is the amount of debt the U.S. has racked up and the slow rate and lack of improvement in the economy. This is a serious issue and it's hard to say what needs to be done to fix this.
ReplyDeleteI also agree that consumers need to spend money, however think more importantly industries have slowed down in advancing an industry. When the recoveries were still high there were new technological advancements being made to help markets. This is why i believe the internet effect wearing off is very crucial to our current recovery. In order to have a fast recovery there needs to be something new in the market to cause this change.
ReplyDeleteI didn't realize that the general consensus regarding the recession was so negative, in the sense that our economy truly isn't coming back strongly. I agree with Katie and Lizzy that consumers do need to spend more money. This is a catch 22, because I think that consumers now don't have the attitude or means to spend as much. The monetary cushion is no longer there for consumers to be brave with their spending habits. It is this hard thing- unemployment and lack in spending-yet an economy that needs spending to recover.
ReplyDeleteThe rate of growth within the economy can be seen as vote of confidence towards its over all health. The private sector sees many unresolved problems: inflation, public debt, and unemployment. The private sectors possess trepidations about the state of economy, and are thusly holding their capital in reserve in order to “ride the storm”. The hesitation can be seen as a practice that can contribute to the sluggishness of the economy. Although the private sector has every reason to hold back, consumer opportunism within the economy will raise the nation out of the economy doldrums.
ReplyDeleteLuckily there is not much evidence that slow growth leads to greater odds of another recession, but with such a fragile economy the US would be more greatly affected by other economic shocks like the fall of the euro. Consumer spending is low and without more consumer spending there will be limited growth but consumer spending in the US accounts for 70% of GDP, which seems to be the source of a lot our economic problems. This suggests that the US needs to restructure its economy. Consumer spending has crowded out investment spending and "investment spending has been associated with higher economic growth" (Stlouisfed). There is little hope that consumer spending will increase in the near future with stagnant incomes, low consumer confidence, and lower wealth. It seems that consumers can no longer be seen as the source of economic growth because "the old consumer spending economy is gone and is not coming back" (Telegraph).
ReplyDeletehttp://www.stlouisfed.org/publications/re/articles/?id=2201
http://www.nytimes.com/2011/07/17/sunday-review/17economic.html?pagewanted=all
I agree with Caroline – this is indeed a Catch 22 situation, only I see it a little differently. Walter mentioned how computational power has increased steadily since the 1970s, and we all understand that technology increases at an exponential rate. This means that computer-designed labor (machines that can do a job previously done by humans) is increasing as well and that more and more jobs that previously required humans can be executed with machines. So as America further industrializes, the possibility of transferring to computer-run labor becomes higher as well. Should we stop industrializing? Not necessarily, but I do think it is necessary to create more jobs for recent immigrants and young people as the baby boomer generation dies out.
ReplyDeleteIt's important to point out that an economic crises is always different and in my opinion that there are many political factors to consider when assessing growth annually. When the American economy was at its worst during the Great Depression, FDR and his New Deal cabinet convinced congress to invest large amounts of money in public works. If you follow the logic of Keynes you realize that spending government money during a recession or depression is the greatest way to stimulate the economy and create jobs. The Republican congress has done everything they can in recent years to stop government spending which could potentially lead to a faster rate of growth. Obama has many good qualities but he isn't the politician FDR was. Good government that invests in public programs that actually produces jobs could tap into the potential growth.
ReplyDeleteIts interesting to adapt this theory and assume that our technological advances are almost plateauing and productivity is leveling off. I think this can be a very valid argument, while there are sooo many advances in technology every day not every new ipad that comes out is going to lead to more economic productivity. While theres obviously strides being made in factory technology and a lot of things are become automated leading to much more efficiency none of these new advances seem to lead to more jobs. I'm interested to see if theres a boom in employment as the US drills more and more oil domestically.
ReplyDeleteYou raise some interesting points and ideas. I think it is much more complicated of a question of why TFP is decreasing in the US than the internet's effect wearing off. I think that the decreased percentage of those in the workforce paired with a declining TFP may indicate that the population is becoming more complacent because younger people are facing high levels of unemployment and not participating in the workforce which to me is similar to many indebted european countries. While this could explain the slow recovery from the recession these factors may have long term implication. With more and more people receiving educations than ever before in the united states the recovery should have been quicker but because many young people havent entered the workforce because of high unemployment it was slowed.
ReplyDeleteThis is a very interesting thought you brought up. I would like to see the study if conducted to see the relation between the TFP and the productivity enhancing of the internet. I truly doubt we have outlived the productivity benefits of the internet but I have not seen the study and what it truly takes into account. I agree that our technology advances are still happening but It would be interesting to see if we have plateaued or if this study is irrelevant to the internet. Anyways interesting post.
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