Could DeLong be correct? The answer matters, because if he’s right, the economy — despite its present strength — faces a future of long-term sluggishness.
Writing in the Milken Institute Review, an economics journal, DeLong accepts the conventional wisdom that the rapid response to the Great Recession by both the Federal Reserve and Congress — the Fed lowered short-term interest rates to near zero, and Congress passed a huge stimulus package of spending increases and tax cuts — prevented a second Great Depression. But his praise stops there.
We are now 11 years removed from the beginning of the crisis in 2007, and income per worker has risen only 7.5 percent, DeLong notes. By contrast, income per worker rose 10.5 percent in the 11 years following the 1929 stock-market crash.
What explains the gap, he argues, is a psychological hangover from the Great Recession. Consumers and businesses are more cautious, and the despondency is likely to persist. He writes:
“We are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. . . . No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.”
“We seem to have fumbled the recovery from the recession,” DeLong says, blaming bad policy. “Early in the recovery, left-center economists (like me) warned that cutting off stimulus prematurely in the name of deficit reduction or inflation-fighting would run huge risks,” he adds. Thus, today’s policymakers deserve low marks compared with their 1930s’ predecessors.
I am sympathetic to DeLong’s analysis, having made somewhat similar arguments myself. The main difference is that I think private caution may have some public virtue. It can dampen financial speculation and boom-bust cycles. Even granting this, I think DeLong overstates his case.
Just how much the economy’s sluggish recovery can be attributed to Americans’ sour mood is unclear. The slowdown has two main causes: first, reduced growth of the labor force, as baby boomers retire; and second, slower growth in productivity — the economic efficiency that raises wages, salaries and profits. During the 1950s, productivity growth averaged nearly 3 percent a year; in the past decade, the average is less than 1 percent.
The retirement of baby-boom workers would have occurred without the Great Recession. The slowdown in productivity growth — reflecting technology, management and worker skills — is not well understood, but may also be independent of the Great Recession.
Victory and defense jobs restored confidence. Fifteen years of depression and war had left a huge backlog demand for cars, homes and appliances. The onset of the postwar baby boom further inflated demand, while shoppers — blocked by rationing from spending their incomes — were awash in savings, which could now be spent. Similarly, new technologies (television, plastics, air conditioning, jet travel) boosted productivity.
All these developments triggered a strong expansion. The circumstances today are much different. Households are trying to restore their savings after the excesses of the housing bubble more than a decade ago. The demographics — mainly aging — have also moved against a stronger recovery. Despite the Internet, so has (it seems) technology.
The lesson of history remains that the World War II economic boom played an essential role in ending the Depression. It wasn’t that policymakers were smarter then than they are now. In fact, the opposite may be true. In 1940, the unemployment rate still exceeded 14 percent. It is doubtful many Americans would trade today’s economy for its prewar predecessor.