Weekend Economists Piece for Peace April 3-5, 2015

[Demeter]

82. The New Job Figures and Secular Stagnation By John Cassidy

http://www.newyorker.com/news/john-cassidy/the-new-job-figures-and-secular-stagnation

...This news shouldn’t have come as surprise. In much of the country, it was an extremely cold winter—colder even than last year, when, for three months in a row, the payroll figure fell below two hundred thousand. A series of other economic indicators, such as retail sales and orders for durable goods, have also come in weak recently, indicating that the economy is stuttering. On Wall Street, some forecasters have reduced their estimates for first-quarter G.D.P. growth to 1.5 per cent, or even less.

That’s not very encouraging, but nor is it something we haven’t seen before. Weak first quarters have become a pattern. Since 2010, economists at Goldman Sachs point out, G.D.P. growth has averaged 0.6 per cent in Q1 and 2.9 per cent the rest of the year. If a similar pattern holds this year, and there isn’t any obvious reason why it shouldn’t, we will see a rise in job creation and G.D.P. growth in the coming months.

But can we expect healthy growth in jobs and incomes to become the norm? In a series of blog posts earlier this week, Ben Bernanke, the former chairman of the Federal Reserve, presented the optimistic view, arguing that many of the “headwinds” that have been holding the economy back in the past five years, such as the housing bust, problems in the banking sector, and restrictive fiscal policy, are now receding. That has been the view of Bernanke’s successor, Janet Yellen, too, and it explains why the Fed has been talking about starting to raise interest rates.

However, there is also an alternative and less optimistic view of the future, popularized by Larry Summers, the former Treasury Secretary. According to Summers’s “secular stagnation” hypothesis, the U.S. economy may be forced to hobble along with modest growth, at best. Harking back to Keynes and Alvin Hansen, one of the early American Keynesians, Summers warns that modern economies face a chronic problem of deficient demand, or excessive saving (to economists, saving and demand are two sides of the same coin), which, absent some vigorous policy actions, will hold them back permanently. Replying to Bernanke, Summers wrote, “I continue to urge that it is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment.”

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In theory, the (LABOR) participation rate should pick up as the economy starts growing again and people become more optimistic. But this time it hasn’t happened. Almost six years after the recession officially ended, the participation rate sits at 62.7 per cent, which ties the lowest rate since the late nineteen-seventies, when far fewer women went out to work. Although some of the decline is probably due to secular factors, particularly the aging of baby boomers, there is no doubt that slow economic growth and a perceived lack of job opportunities have also played a big part in the process. And at this stage, it seems, many of the discouraged workers have dropped out of the labor force for good.

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