Macro situation notes
Still on the road, but with better access now. So I can weigh in briefly on the current macro situation.
I agree almost entirely with Janet Yellen’s take (via Calculated Risk.) But I thought I’d add a couple of pictures to illustrate just how big the difference is between the technical end of the recession, which has probably happened, and anything resembling a satisfactory performance.
So first, let’s look at how deep a hole we’re in. Rather than going into the details of output gap calculations (Menzie Chinn at Econbrowser has been doing that very well), let me present the most naive calculation: comparing actual GDP since the recession began with what it would have been if the economy had continued growing at its trend (from 1999 to 2007).
So we’re something like 8 percent below where we should be. That translates into lost output at a rate of well over a trillion dollars per year (as well as mass unemployment). And we’ll keep suffering those losses, even if GDP is now growing, until we have enough growth to close that gap. Since there’s nothing in the data or anecdotal evidence suggesting any gap-closing in progress, this is a continuing tragedy.
And that’s assuming that we don’t have any backsliding, aka a double-dip recession.
There’s a tendency to treat worries about a double dip as outlandish, as something only crazy people like the people who, um, predicted the current crisis worry about. But there are some real reasons for concern. One is that the lift from fiscal stimulus will start to fade out in a couple of quarters. Another is that, as Yellen points out, most of the boost we’re getting now is tied to inventories. And that’s a one-time thing.
You don’t have to look back very far to see just how transitory an inventory-led boost can be. The figure below shows growth before, during, and after the 2001 recession, together with the contribution of inventory changes to growth. Notice the boost from 2001IV to 2002I from inventories, then the fading out that almost, but not quite, turned into contraction later in 2002. It wasn’t literally a double-dip, W-shaped recession, but it came close.
((CHART DIDN’T COPY . SEE AT NYTIMES.COM)))
In a rational political and policy environment, the implication of all this would be clear: we need more stimulus. Yes, it would add to federal debt — but isn’t that worth doing to help reduce an output gap that’s wasting our potential at the rate of more than a trillion dollars a year?