If you haven’t already read the wonkishly titled Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy, it is definitely worth your time.
Written by David Wilcox, the head of research at the Federal Reserve, and two other Fed economists, this paper argues that the Great Recession and the years of weak recovery have done long-term damage to the American economy.
It’s not just sustained high unemployment, weak output and continued stagnant wages. The consequences are a negative feedback loop of lost productive capacity. They use the term “hysteresis” to describe the phenomenon, in this case the ecosystem of the economy being dependent on past conditions, not merely those of the present.
Most important, their research shows that the crisis and its aftermath “shaved” almost 7 percent off potential output based on the trend up to 2006. That’s almost $1.2 trillion.
With hiring rates down, many workers have given up searching for jobs and have dropped out of the labor force. (According to today’s employment report, the labor-force participation rate hit yet another low in October: 62.8 per cent.) With budgets tight, corporations and government departments have cut back on investments in new plants and machinery, computer hardware and software, and research and development. And, with investments in innovation depressed, the rate of over-all productivity growth has slowed down.
We come back to the original sin of policymakers: Saving the Too Big to Fail Banks without providing a large enough — and sustained — stimulus to fill the enormous demand hole created by the recession. Quite the opposite: D.C. has been engaged in severe austerity. One piece of this is federal employment at a 47-year low.
Hardly any of the big investments, such as high-speed rail, discussed in the immediate aftermath of the crisis ever went anywhere. Indeed, infrastructure spending has plummeted.
No wonder inequality is getting worse and so many jobs are in fast food, that some 40 percent of workers make $20,000 or less, that labor-force participation has fallen so dramatically. Cut funding for infrastructure, education, retraining, research and even food stamps, while subsidizing rich corporations, and this is what you get. Garbage in, garbage out. Bad policy in, human suffering out.
And America’s military power rests on a strong economy, including a large and upwardly mobile middle class — not vice versa.
Popping champagne when the economy produces 204,000 jobs or grows 2.8 percent shows how addled we have become. These are relatively weak numbers, even if better than the recent usual. Until the quality of inputs changes, this disastrous feedback loop will continue. And we won’t be Japan. Japan had universal health care and reasonably good employment during its “lost decade.”
And Don’t Miss: How China became the world’s largest junkyard | The Atlantic
Today’s Econ Haiku:
Ode to Machinists
Friends don’t let friends vote angry
Stay cool, like Boeing