I have said this on many prior occasions, and it bears stressing and focused repetition, that there is an ongoing and troubling change blowing in the academic winds of economic orthodoxy. It is troubling because there seems to be no challenge to these “best and brightest” that are essentially trying to excuse their own systemic failure. The lack of recovery since the Great Recession is being used as evidence for failure in the economy rather than empiricism about wholesale failure of economic control.
The orthodox doctor is blaming the patient for exhibiting chronic deficiencies from all the gruesome experimentation over the years. The cohort of philosopher kings that have interfered with finance and systemic pricing for decades now gaze forth with childlike incredulity as to why the economy is paralyzed despite repeated intrusive surgery, with blunt force instruments no less, into the central nervous system.
This idea has been leaked out slowly and deliberately, starting (in my awareness of it) with the “discussion” about a potentially negative natural interest rate. That was a mathematical approach to orthodox economists’ math not calculating as they expected. In the new Yellen regime, there has also been a detectable shift as it relates to QE’s role and efficacy, one that parallels exactly this excuse-making behavior.
Now the New York Times notes that the fiscal side has latched on hard and tight to this narrative, as it provides convenient political cover – that is and will be very much bipartisan.
Household incomes continue to stagnate, and millions of Americans still can’t find jobs. And a growing number of experts see evidence that the economy will never rebound completely.
Why might that be the case?
“Many today wonder whether something that has always been true in our past will be true in our future,” Mr. Lew told members of the Economic Club of New York. “There are questions about whether America can maintain strong rates of growth and doubts about whether the benefits of technology, innovation and prosperity will be shared broadly.”
That might be a nice-sounding platitude, but it really is intentionally and deceitfully innocuous and passive. Secretary Lew’s submission is strikingly silent on why and how innovation and technology have suddenly stopped creating a broad and sustainable growth trend. Innovation has been the steady and reliable lifeblood of the American economy since before its founding, yet all of the sudden technology and advancement no longer deliver?
The CBO even created a spiffy graphic to accompany this politicking, via the same New York Times article.
That certainly looks exactly like what the orthodoxy is trying to make of it, but this is not evidence any more than hearsay is admissible in court. It all comes down to how you calculate, and even define, “potential GDP.” If you use the typical Phillips Curve baseline, you might come to these conclusions (even with neo-Keynesian updates it doesn’t change the narrow construction). If, however, you broaden your horizon of inflation and its misallocation effects, you may conclude that “potential” growth has been held artificially too high for too long.
In other words, the economy is not now underperforming, it is only “catching down” to this more broadly defined idea of potential that includes both consumer and asset inflation. But even that idea is too innocuous as to what has really transpired. To gain such inflation as a matter of intentional policy, created and executed by these same people now groping for excuses, required an immense intrusion of financialism. The nefarious “wealth effect” has been obtrusive on the economic trajectory for decades now, and since asset inflation is so incredibly inefficient the intended impacts on economic growth meant not just heavy financialism but rather total financial domination.
The Great Recession was, in general terms, a belated realization of exactly that. The policy response to save modern banking through a bank-first approach was essentially a conscious choice to preserve economic control through the same financialism. The price the economy pays for that is just now being recognized – financialism actually bends the trajectory of economic growth down through persistent and heavy misallocation of resources.
The guiding hand of all this monetarism and soft central planning has been the theory that policy measures could “fill in the trough without shaving off the peaks.” That sentiment drove both Greenspan’s belief that he could eliminate the business cycle altogether and the believability by which the media and economists fell for it.
The New York Times article makes what sounds like, in the context of that idea, a startling admission, but only if you hear it in this context.
The pessimism is a striking departure from economic orthodoxy. Recessions cause considerable suffering, including permanent disruptions to individual lives, but most economists have long asserted that recessions do not reduce the economy’s capacity to supply goods and services.
That sounds an awful lot like saying someone or something has “shaved off the peak.” It would be a tremendous positive if it represented the first step toward reform. However, the next step of connecting only two dots between the shaved off peaks and monetary policy will not likely be made by the policy and political classes on their own. They are just too invested in that ideology to listen to their long-buried common sense and intuition.
The economy is not the problem, nor is it long-term growth “potential.” The American resiliency remains embedded in the system, only that it has been knocked off its historical stride by decades of financialism and its dangerous and ultimately self-defeating allure of “easy money.” End the “easy money” and potential growth will be self-evident and totally free from any need for convoluted and self-indulgent excuses.