Consider the dominant story that economic forecasters have been telling you for years now: The U.S. economy just can’t catch a break. It has been poised time and again to rocket back to a growth rate that would recapture all the ground lost in the Great Recession, while delivering big job gains. But every time, some outside event scuttles things. The euro crisis flares up. A Japanese tsunami scrambles global supply chains. Lawmakers play chicken with the federal debt limit.
Most recently, “fiscal cliff” tax hikes and sequestration budget cuts are playing the culprit. And the bad-luck economy, like a fireball pitching prospect dogged by freak arm injuries, never reaches its full potential.
Now consider the possibility that the can’t-catch-a-break story gets it backward. What if the economy isn’t particularly unlucky? What if it’s basically doing what we should expect it to? What if something has changed, thanks to fallout from the recession, or a string of bad policy choices, or both, and growth has shifted into a lower gear? What if this slow and fragile expansion is as good as we’re likely to get for a while?
This is an alternative story that economists across the ideological spectrum have begun to explore. If it’s correct, the implications for economic policy are big.
First, let’s review some facts. The U.S. economy grew by 2.2 percent last year, 1.8 percent the year before, and 2.4 percent in 2010. That was not enough growth to bring down unemployment speedily, which is why — three and a half years after the recession officially ended — 12 million Americans are still looking for work.
Growth has also consistently fallen short of forecasters’ expectations. At the end of 2009, for example, economists at the Federal Reserve projected the economy would grow by 2.5 percent to 3.5 percent in 2010. In 2011, they said growth would be 3.4 to 4.5 percent; in 2012, they said 3.5 to 4.8 percent. Each year, actual growth fell short of the lower number in the range. And each year, the Fed adjusted and predicted that faster growth was right around the corner. This isn’t to pick on Chairman Ben S. Bernanke’s crew — economists were similarly over-optimistic at the Congressional Budget Office and in several large Wall Street research divisions.
Where our stories diverge is on the reasons those forecasts were wrong.
Here’s the standard explanation, from a sharp economist named David E. Altig, the executive vice president and director of research at the Federal Reserve Bank of Atlanta. Altig says the economy would have grown faster if a bunch of unanticipated problems — most notably the European financial crisis, in all its iterations, and the now-frequent instances of fiscal brinkmanship in Washington — hadn’t popped up to rattle consumers and business executives.