CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press Optimism Ain't What It Used to Be

Optimism Ain't What It Used to Be

Sunday, 16 June 2013 13:44

The NYT ran a piece telling readers "even pessimists feel optimistic about the American economy." What is striking is the nature of the optimism reported in the article. At one point the article gives as one example of this optimism:

"Mr. Behravesh (the chief economist at IHS Global Insight) now expects the annual growth rate to rise to 2.9 percent in 2014 and 3.5 percent in 2015."

The trend rate of GDP growth is between 2.2-2.5 percent according to the Congressional Budget Office (CBO) and other forecasters. CBO puts the economy now at roughly 6.0 percent below its trend level of output. If we take the average of Behravesh's forecast for the next two years and assume that the economy sustains this rate going forward, then the economy will be growing at a rate of 3.2 percent.

At that pace it will be closing the output gap at a rate of between 0.7-1.0 percentage point a year. If we take the higher number (1.0 percentage point) then we will get back to potential output in 2019, making this downturn as long as the Great Depression. If we take the lower number then we won't get back to potential GDP sometime in 2021, making this a 14-year downturn.

It would be interesting to know what the real pessimists say.

Comments (14)Add Comment
Why does potential GDP run right through the peak of the housing bubble
written by Capt. J Parker, June 16, 2013 4:17
If there really was a housing bubble then isn't it reasonable to think output at the peak of the bubble was above the sustainable potential GDP trendline? If this were so then the output gap is smaller than 6%. There is still a gap - unemployment is too high but, is our goal really to get back to where we were at the peak of the housing bubble? Or, was the bubble not really a bubble?
Real pessimist says
written by geraldmcgrew, June 16, 2013 4:42
This downturn is not just a business cycle recession. It is a structural crisis. Just as the Great Depression of the 1930s included multiple recessions (1929-33 and 1937-38) and also expansions (1933-37), the current anemic recovery will be followed by another recession before this structural crisis comes to an end.

The crisis is not likely to be resolved until major economic restructuring takes place (whoops- optimism!), which will not be a simple process.
Real pessimist said
written by geraldmcgrew, June 16, 2013 4:51
(h/t to David M. Kotz, The Current Economic Crisis in the United States: A Crisis of Over-investment)
the soft bigotry of low expectations
written by Jennifer, June 16, 2013 6:22
Pieces like this are shameful really, we have been plodding along at about the same rate for years now. There is really no reason to think anything is going to change, and an article like this is really just to placate the masses.
@ Capt. J Parker
written by A Populist, June 16, 2013 8:12
Re: "If there really was a housing bubble then isn't it reasonable to think output at the peak of the bubble was above the sustainable potential GDP trendline?"

It depends on what you mean by "sustainable".

Was the housing bubble unsustainable because there was not enough labor or resources to continue building houses? Certainly not the case. Wages were not rising, and there were no significant shortages of material of which I am aware.

Was the housing bubble unsustainable because the people buying the homes did not have sufficient wages to buy the homes at the selling prices? Yes, but that is a financial constraint - *not* an indicator of some real unsustainable supply constraint. When those who wish to consume, have a lack of money to do so, even as there is abundant capacity to supply their needs (unemployed workers, plenty of goods on shelves, manufacturers waiting to get more orders) - that is the classic example of a lack of Demand - not lack of Supply.

Was it a bubble? Certainly. Was it a poor use of resources, driven by speculative dynamics, and a lack of other, more rational places to invest? Yes.

But the fact that, even at the peak of the bubble, there was no overall shortage of workers (which would have been made obvious by sky high wages for the "most needed" workers), demonstrates that our economy does not have sufficient demand for "nearly full employment" - unless the people who want to consume, get more money in their hands. Since our dysfunctional economy has a chronic oversupply of workers, their pay is low (supply and demand in the labor market). When they were loaned money (to buy houses) they generated enough demand to *almost* create full employment. Of course, for a variety of reasons (low wages, sudden unemployment after popping the bubble, people buying homes they didn't need, etc) the housing bubble was unsustainable.

The alternative (and better) scenario, would have been to pop the bubble. We would have thus eliminated a lot of the cyclical part of the demand deficit we have experienced post-bubble (housing overhang, debt overhang). But we would then have had much higher unemployment in 2004-2007 (or whatever you define as the bubble period), absent the added demand of the bubble, due to the secular component of the demand shortfall. (We would never have recovered from the popping of the Internet bubble). This largely unacknowledged secular component to our demand shortfall, will continue to affect our economy, until it is dealt with, through either higher consumption, or shorter working hours, or earlier retirement.

If you look back at the past decades, there has been high unemployment, except for bubble periods - tech, Internet, then housing.

To look at periods of high unemployment, and define this as "normal", results in policies which will make this a permanent "normal" - which is unacceptable.

The housing bubble proved one thing - very low unemployment without excessive wage inflation, is indeed possible. While the bubble-level of output was high, it is obviously achievable, and also sustainable - if we have a system designed to make it so.

If we were to raise the minimum wage (a lot), workers could consume more, employing more workers, and eventually workers could afford to work fewer hours, and bring the labor market back to balance.
written by watermelonpunch, June 16, 2013 8:30
"even pessimists feel optimistic about the American economy."

Was it called Bizzarro World... you know the place where optimism is pessimism, and pessimism is optimism?

I'm assuming this guy was not talking about the general public, of course. Right?
small bog frog
written by carlyle, June 16, 2013 9:55
This pessimist says we will pay labor more or we will be in the tank forever. There are still no rewards for workers.
A smarter administration would press for improvement of the minimum wage, the United States provides a minimum wage of about twenty eight percent of our median wage. The wealthy European countries plus Canada and Australia have minimum wages equal to forty five to forty eight percent of their national median wages. We are way behind the world indicating our governments contempt for working people.
If You Can't Stand the Heat of Making Macro Soup, Get Out of the Kitchen
written by Last Mover, June 16, 2013 10:50

From the article is this:

For example, slower growth in the cost of health care will be a boon for the government and businesses, but will actually subtract from reported economic activity. “It’s like the music industry,” he said. “Revenues are lower at record companies but the experience for listeners is better.”

It's like Jennifer says above about the soft bigotry of expectations. If they keep stirring the pot of soup long enough and dumping enough stuff into it at the micro level and tasting it along the way to see if it's ready, all they're going find is evidence not generally related to the big picture of macroeconomics that explains the output gap as clearly as Dean Baker does.

The required aggregate demand to close the output gap lost from the reduction in housing wealth is simply not there, hasn't been there for five years and won't be coming back anytime soon.

This was caused by a combination of gross incompetence and clear intention to steer and keep the economy in a sustained deep stagnation after the housing bubble burst on grounds of austerity principles that can make sense at a micro level like the paragraph above, but have very little to do with macro based root cause of the problem.
written by liberal, June 17, 2013 7:41
A Populist wrote,
But the fact that, even at the peak of the bubble, there was no overall shortage of workers (which would have been made obvious by sky high wages for the "most needed" workers)...

I mostly agree, but you have to correct for immigration. At least in the building trades, ISTR that a large fraction of the workers were immigrants from Latin America. (At least here in the DC area.)
pessimism is the reality of these times
written by mel in oregon, June 17, 2013 8:09
In order to have a meaningful conversation on the economy you must account for all events that are now & have been taking place for decades. Skipping the fact that the Earth's population has increased from 2 billion in 1950 to 7 billion today makes no sense. We are going to use up our water & oil with no possible replacement. That's the reality, so worrying about minor in comparison inequites like the explosion of the latino displacement of native born workers here in the United States, the removal of programs such as Head Start, food stamps & unemployment insurance, increasing the long over-due minimum wage, making a progessive fair tax system, or stopping our out of control war economy, while all extremely important, just doesn't get at the real problem. Face it folks, the power structure in the United States & in all the rest of the world too, are very aware that time is running out, & that humans won't be around in 50 or 100 years. They just want to seize all power & resources at any cost. That's the real reality. Get used to it...
@ A Populist
written by Capt. J Parker, June 17, 2013 8:14
Was the housing bubble unsustainable because the people buying the homes did not have sufficient wages to buy the homes at the selling prices? Yes, but that is a financial constraint - *not* an indicator of some real unsustainable supply constraint.

I don't agree with the quoted statement. For consumption to be sustainable we must produce as much as we consume. Actually, we must produce more than we consume to have resources left for capital formation. During the housing bubble we were consuming more than we were producing. we could do this because the rapid rise in housing prices made it relatively easy to finance this excess consumption. This was not a sustainable situation and in fact, the consumption boom didn't last. The bust wasn't simply because of a credit market melt-down. The credit market problem was fixed rather quickly. The lack of demand remains because consumers who were leveraging and consuming based on very high expectations for their future finances are no longer willing to do this and even if they were, creditors are no longer willing to finance them. In fact, creditors are demanding they deleverage.

As you do, I yearn for a booming economy were unemployment is low, wages are high and we are producing enough to consume a lot and still have enough for capital formation, both physical and human. I don't see 4% inflation plus deficit financed big time fiscal stimulus getting us there. It may us get us back to high home prices, high consumption, high leverage, and lower unemployment but, that's back to the bubble where we were consuming more than we were producing and that wasn't sustainable. Fiscal stimulus will probably help unemployment some simply because if you subsidize job creation you get at least a little job creation. But stimulus is not sustainable. Just like a tax cut, stimulus does not pay for itself, it's more consumption in excess of production.
Housing rebound in Bay Area and Sacramento
written by Bungalow Bill, June 18, 2013 12:28
Comment - wishful thinking? Much of the surplus has been purchased by flippers and small real estate investment groups driving the prices up. Prices are rising enabling some underwater owners to dumb/sell or refinance.
@ Capt. J Parker
written by A Populist, June 18, 2013 1:13
Re: "but, that's back to the bubble where we were consuming more than we were producing and that wasn't sustainable."

Now it is more clear exactly where you are coming from.

So, we are taking "capital" to mean real physical equipment (and say, training), to exclude excess cash on the sidelines, right? (Obviously, with investors willing to invest at near zero interest rates, and major corps having trillions in the bank, we are not talking about lack of cash for investment).

In a capitalist/market economy, the way that you find a shortage of something, is by rising prices. What kind of capital goods are in short supply? Restaurants? Factories? Surely, if the thing holding back the economy is lack of the wherewithal to create goods and services, we should be able to come up with some examples, right?

Look, I actually see your point on stimulus - to a degree.

And, I can see your logic that leads you to believe that we had "stored up" some kind of capital before the bubble that was "used up", allowing us to consume more (although in the real business world, inventories and capital are always kept at a minimum, as much as possible, so I disagree with that assessment).

But the evidence does not support that lack of physical or human capital is holding back the economy.

Market economies are more efficient, because they use the signals of demand (in the form of shortages and higher prices) to indicate where capital investments should be made, in order to profit. This demand starts with consumption, and ripples through the entire economy. If there is a shortage or bottleneck anywhere along the way, that will show up in the form of shortages, and higher prices.

Where are they?

The idea that the only way to have decent wages and low unemployment is to have "consumption exceed production" seems unsubstantiated.
@ A Populist
written by Capt. J Parker, June 18, 2013 10:46
The shortage was a shortage of entrepreneurial activity outside of home building and home financing during the boom. This underinvestment in everything but housing is the reason for today's unemployment. Low unemployment requires sound investment.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.