WASHINGTON — Recessions are always painful, but the Great Recession that ran from late 2007 to the middle of 2009 may have inflicted a new kind of pain: an era of slower growth.
It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average.
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.
For more than a century, the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock.
Even after the prolonged Great Depression of the 1930s, growth eventually returned to an average pace of more than 3 percent a year. But Treasury Secretary Jacob J. Lew, citing the Congressional Budget Office, said on Wednesday that the government now expected annual growth to average just 2.1 percent, about two-thirds of the previous pace.
“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.”
The most recent recession and the slow recovery have “left lasting scars on the economy,” the Labor Department concluded late last year in a report that declared slower growth “the new normal” for the American economy.
The Federal Reserve, persistently optimistic in its previous forecasts, said in March that it no longer expected a full recovery in the foreseeable future.
Lawrence H. Summers, formerly President Obama’s chief economic adviser and now a leading member of this Cassandra chorus, has warned that growth may fall short of expectations unless the federal government increases its spending on things like upgrading deteriorating roads and bridges and the development of new technologies.
“A soft economy casts a substantial shadow forward onto the economy’s future output and potential,” he said in a speech in April. 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.
Some economists still expect a complete recovery. They say it takes a long time to recover from financial crises, and that the healing process has been set back unexpectedly by cuts in government spending, by Europe’s woes and, most recently, by a hard winter.
Other economists, also committed to the orthodox view of recessions, argue that the slower growth is here to stay, but say that it is the result of longer-term trends that predate the recession, like fewer Americans entering the work force and less innovation.
“We have recovered” from the recession, said Tyler Cowen, a professor of economics at George Mason University.“We just don’t like what that looks like.”
The emerging view espoused by an eclectic range of economists — including Mr. Summers; Paul Krugman of Princeton and an Op-Ed page columnist for The New York Times; and Robert E. Hall of Stanford University’s conservative Hoover Institution — accepts that slower growth is partly the result of long-term trends.
It is an unfortunate coincidence, in effect, that just as the floor was giving way, the ceiling was falling, too. But these analysts also see mounting evidence that recessions, and slow recoveries, can have enduring consequences.
Since 2007, the Congressional Budget Office has cut its estimate of potential economic output in 2017 by a total of about 7 percent, or $2,500 per American.
The budget office says the recession is responsible for a quarter of the cuts. It attributes the rest to long-term trends. An analysis published last month by Mr. Hall argued that the recession played an even larger role.
Much of the scrutiny has focused on the labor market. The share of adults with jobs fell sharply during the recession and has rebounded only slightly because many people have simply stopped looking for work.
The situation is likely to improve somewhat as the economy gains strength, but part of the decline is tied to factors that are more permanent. They include the share of Americans claiming federal disability benefits, which rose sharply in recent years.
Few of those people will ever return to the work force after receiving benefits. At the same time, fewer immigrants have been arriving. There are almost two million fewer people over the age of 16 than the federal government had projected back in 2007.
The recession also reduced the number of future workers. The birthrate has declined each year from 2007 to 2012, the most recent for which data is available. Economic prosperity is determined not just by the number of workers but, even more important, by their output per hour of work.
There is growing speculation that decisions made in the wake of the recession have weakened that output, too.Government spending and public investment has fallen by almost 8 percent, the largest decline in more than half a century.
Corporate investment has also been lackluster. As with the labor market, there is a clear short-term problem and also a long-term trend.
John G. Fernald, an economist at the Federal Reserve Bank of San Francisco and a leading expert on productivity, argued in a 2012 paper that the growth of productivity had slowed as companies completed a cycle of technological investment.
But in a much-discussed paper last year, three senior Fed economists argued that productivity growth could take a long-term hit because fewer businesses were being created and existing ones were spending less on research and development.
This view remains controversial. “Productivity forecasts have had no success historically,” Mr. Hall wrote in his recent analysis.
“Whether the return to a normal economy will result in a catch-up in productivity growth in the longer term is an unsettled question.”Another unsettled question is whether the federal government can help.
Gauti Eggertsson and Neil Mehrotra, economics professors at Brown University, argued in a recent paper that the combination of the financial crisis, fewer workers and rising income inequality could leave the economy in a state of “permanent recession.”
The paper, which sought to formalize recent conceptualizing about so-called secular stagnation, argued that in a normal cycle, falling interest rates would eventually generate sufficient demand to restore the economy to its historical growth rate.
But the Fed has held interest rates near zero since late 2008 and there has been no such rebound. The researchers concluded that the economy might experience “a permanent slump in output” without bold new measures to spur investment, like a large increase in government spending or higher inflation.
Mr. Lew, the Treasury secretary, argued on Wednesday that smaller steps, like increased immigration and improved education, could help too.
“The choices we make over the years to come can alter this projection” of slower growth, he said. There is little prospect a divided Congress will embrace either approach, but there are still some reasons for optimism.
For all his doubt about the current outlook, Mr. Cowen, author of “Average Is Over: Powering America Beyond the Age of the Great Stagnation” (Dutton, 2013), expects that some existing innovations, and some as yet undreamed, will eventually drive faster growth. Just not very soon.
“If you’re 40 now,” Mr. Cowen said, “I don’t see why you ever see it, or enjoy it as a worker.” While worried about a slowdown, Mohamed El-Erian, chief economic adviser at Allianz, sees even odds over the next five years that the economy will grow more quickly.
“I don’t believe the U.S. economy can remain for a long time in secular stagnation,” Mr. El-Erian, who correctly predicted the current malaise in 2009, said in an interview. “It’s like a car that has to be either in fourth gear or in neutral.
There’s too much leverage in the system. If we don’t get growth, the leverage becomes an issue. If we don’t grow out of our debts, the debt is going to discourage economic activity and we’re going to have trouble growing 2 percent a year.”
Finally, while it is human nature to assume trends will persist, they often don’t. During the 1930s, many economists predicted that growth would not resume its earlier pace.
Alvin Hansen, a Harvard University professor, coined the term “secular stagnation” to describe his view that changed circumstances, including a lower birthrate, would prevent a full recovery.
Mr. Hansen was spectacularly wrong. After World War II, the number of babies boomed — and so did the economy.
nytimes.com
It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average.
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.
For more than a century, the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock.
Even after the prolonged Great Depression of the 1930s, growth eventually returned to an average pace of more than 3 percent a year. But Treasury Secretary Jacob J. Lew, citing the Congressional Budget Office, said on Wednesday that the government now expected annual growth to average just 2.1 percent, about two-thirds of the previous pace.
“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.”
The most recent recession and the slow recovery have “left lasting scars on the economy,” the Labor Department concluded late last year in a report that declared slower growth “the new normal” for the American economy.
The Federal Reserve, persistently optimistic in its previous forecasts, said in March that it no longer expected a full recovery in the foreseeable future.
Lawrence H. Summers, formerly President Obama’s chief economic adviser and now a leading member of this Cassandra chorus, has warned that growth may fall short of expectations unless the federal government increases its spending on things like upgrading deteriorating roads and bridges and the development of new technologies.
“A soft economy casts a substantial shadow forward onto the economy’s future output and potential,” he said in a speech in April. 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.
Some economists still expect a complete recovery. They say it takes a long time to recover from financial crises, and that the healing process has been set back unexpectedly by cuts in government spending, by Europe’s woes and, most recently, by a hard winter.
Other economists, also committed to the orthodox view of recessions, argue that the slower growth is here to stay, but say that it is the result of longer-term trends that predate the recession, like fewer Americans entering the work force and less innovation.
“We have recovered” from the recession, said Tyler Cowen, a professor of economics at George Mason University.“We just don’t like what that looks like.”
The emerging view espoused by an eclectic range of economists — including Mr. Summers; Paul Krugman of Princeton and an Op-Ed page columnist for The New York Times; and Robert E. Hall of Stanford University’s conservative Hoover Institution — accepts that slower growth is partly the result of long-term trends.
It is an unfortunate coincidence, in effect, that just as the floor was giving way, the ceiling was falling, too. But these analysts also see mounting evidence that recessions, and slow recoveries, can have enduring consequences.
Since 2007, the Congressional Budget Office has cut its estimate of potential economic output in 2017 by a total of about 7 percent, or $2,500 per American.
The budget office says the recession is responsible for a quarter of the cuts. It attributes the rest to long-term trends. An analysis published last month by Mr. Hall argued that the recession played an even larger role.
Much of the scrutiny has focused on the labor market. The share of adults with jobs fell sharply during the recession and has rebounded only slightly because many people have simply stopped looking for work.
The situation is likely to improve somewhat as the economy gains strength, but part of the decline is tied to factors that are more permanent. They include the share of Americans claiming federal disability benefits, which rose sharply in recent years.
Few of those people will ever return to the work force after receiving benefits. At the same time, fewer immigrants have been arriving. There are almost two million fewer people over the age of 16 than the federal government had projected back in 2007.
The recession also reduced the number of future workers. The birthrate has declined each year from 2007 to 2012, the most recent for which data is available. Economic prosperity is determined not just by the number of workers but, even more important, by their output per hour of work.
There is growing speculation that decisions made in the wake of the recession have weakened that output, too.Government spending and public investment has fallen by almost 8 percent, the largest decline in more than half a century.
Corporate investment has also been lackluster. As with the labor market, there is a clear short-term problem and also a long-term trend.
John G. Fernald, an economist at the Federal Reserve Bank of San Francisco and a leading expert on productivity, argued in a 2012 paper that the growth of productivity had slowed as companies completed a cycle of technological investment.
But in a much-discussed paper last year, three senior Fed economists argued that productivity growth could take a long-term hit because fewer businesses were being created and existing ones were spending less on research and development.
This view remains controversial. “Productivity forecasts have had no success historically,” Mr. Hall wrote in his recent analysis.
“Whether the return to a normal economy will result in a catch-up in productivity growth in the longer term is an unsettled question.”Another unsettled question is whether the federal government can help.
Gauti Eggertsson and Neil Mehrotra, economics professors at Brown University, argued in a recent paper that the combination of the financial crisis, fewer workers and rising income inequality could leave the economy in a state of “permanent recession.”
The paper, which sought to formalize recent conceptualizing about so-called secular stagnation, argued that in a normal cycle, falling interest rates would eventually generate sufficient demand to restore the economy to its historical growth rate.
But the Fed has held interest rates near zero since late 2008 and there has been no such rebound. The researchers concluded that the economy might experience “a permanent slump in output” without bold new measures to spur investment, like a large increase in government spending or higher inflation.
Mr. Lew, the Treasury secretary, argued on Wednesday that smaller steps, like increased immigration and improved education, could help too.
“The choices we make over the years to come can alter this projection” of slower growth, he said. There is little prospect a divided Congress will embrace either approach, but there are still some reasons for optimism.
For all his doubt about the current outlook, Mr. Cowen, author of “Average Is Over: Powering America Beyond the Age of the Great Stagnation” (Dutton, 2013), expects that some existing innovations, and some as yet undreamed, will eventually drive faster growth. Just not very soon.
“If you’re 40 now,” Mr. Cowen said, “I don’t see why you ever see it, or enjoy it as a worker.” While worried about a slowdown, Mohamed El-Erian, chief economic adviser at Allianz, sees even odds over the next five years that the economy will grow more quickly.
“I don’t believe the U.S. economy can remain for a long time in secular stagnation,” Mr. El-Erian, who correctly predicted the current malaise in 2009, said in an interview. “It’s like a car that has to be either in fourth gear or in neutral.
There’s too much leverage in the system. If we don’t get growth, the leverage becomes an issue. If we don’t grow out of our debts, the debt is going to discourage economic activity and we’re going to have trouble growing 2 percent a year.”
Finally, while it is human nature to assume trends will persist, they often don’t. During the 1930s, many economists predicted that growth would not resume its earlier pace.
Alvin Hansen, a Harvard University professor, coined the term “secular stagnation” to describe his view that changed circumstances, including a lower birthrate, would prevent a full recovery.
Mr. Hansen was spectacularly wrong. After World War II, the number of babies boomed — and so did the economy.
nytimes.com
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