The case against economic pessimism
I’m in Kansas City for an economics conference put on by the Kauffman Foundation. I came because it sounded like fun. But we’re four hours into it and I’m really, really depressed.
The first panel saw economists Brad DeLong, Tyler Cowen, Scott Sumner and Karl Smith talking about the U.S.’s long-term growth potential. Smith was fairly sunny. He sees a recovery coming, and thinks it will be strong. The others were terribly pessimistic. The consensus was that, at best, economic performance will be underwhelming over the next decade. So let me try my hand at a more optimistic scenario — or, at the least, at an explanation for why we might be overly pessimistic right now.
In late 2009 and early 2010, we looked to be headed toward a fairly strong recovery. We didn’t get there. But why you think we didn’t get there matters enormously for what you think will happen to the economy in the coming decades.
A number of policymakers and macroeconomic forecasters will tell you we didn’t get there because we faced a run of bad luck and bad decisions. If you add up the effect of the European debt crisis, the tsunami that hit Japan, the rise in oil prices that was driven by unrest in the Middle East, and the debt-ceiling debacle, it’s more than enough to explain the interrupted recovery. But the interrupted recovery led most people to a different explanation.
First, there was a subset of very smart, very pessimistic economists who had long been arguing that we were entering a “new normal.” They predicted that the recovery would disappoint us because, for a variety of reasons, our economy just isn’t capable of the sort of recoveries and the sort of growth it once was. Then the recovery did disappoint us, and so the people telling this story began to look like they had it right. And if they had it right, then growth would be disappointing going forward.
Second, there was a set of very smart, relatively optimistic economists who had been predicting a stronger recovery than we got. And since nobody likes being wrong again and again, they became skittish about making optimistic forecasts. They became, as a class, more pessimistic.
But some in this group have argued to me that they think we’ve drawn the wrong lesson from the last few years. The recovery was disappointing, yes. But not because our economy is entering some new and more painful “normal.” The recovery was disappointing because a lot of things went wrong. And you see evidence of that in both payroll growth and economic growth over the past six months, which has been much stronger than the predictions of both most forecasters and most economists who bought into the “new normal” hypothesis.
In this telling, economists and economics have become “structurally pessimistic,” and for the wrong reasons: The weak recovery had strengthened a hypothesis that the data doesn’t really support, and, in a related development, professional incentives had realigned to favor pessimistic forecasts over optimistic ones. That’s why they made this argument to me in private.
Even if you believe this, of course, there’s a worrying counterargument. It goes something like this: Sure, the recession was interrupted in 2010 by bad luck and bad decisions. But some of those bad decisions show realities that underlie our political systems and will recur in the coming years.
The American political system is polarized and gridlocked and the European Union is structurally flawed. Those two facts will continue to lead to bad decisions going forward. And the slow recovery, even if it was partly the fault of bad luck, is creating permanent problems: People who have been out of work for three or four years are going to have a hard time ever finding work again, as both their skills and their ties to the labor force erode. Sometimes, you don't recover from bad luck.
Who’s right? I have no idea. If nothing else, these arguments have convinced me of the danger of making confident forecasts. But I hope the optimists have it right. The alternative is, well, depressing.