by Michael Roberts
In a recent article (http://www.bloombergview.com/articles/2015-02-11/what-we-know-about-recessions-might-be-wrong), Noah Smith pointed out that “Modern
macroeconomists think that recessions and booms are random fluctuations
around a trend. These fluctuations tend to die out — a deep recession
leads to a fast recovery, and a big expansion tends to evaporate
quickly. Eventually, the trend re-establishes itself after maybe five
years. No matter what happens — whether the central bank lowers interest
rates, or the government spends billions on infrastructure — the bad
times will be over soon enough, and the good old steady growth trend
“But what if it’s wrong?” says Smith, “What if recessions deal permanent injuries to an economy”.
Smith pointed out that right-wing economists have criticised the idea
that after every recession comes a boom. Greg Mankiw (see my post,
back in 2009, reckoned that the Great Recession would herald a
lost decade of output as major economies failed to get back to the trend
growth rate before the crisis. Ironically, as smith says, liberal
Keynesian economist, Paul Krugman, was among the optimists. He was wrong
and Mankiw was right.
Of course, Keynesians do have an answer to why economies don’t bounce
back after a deep recession. I have described their arguments in
various papers and posts (https://thenextrecession.wordpress.com/2013/11/20/a-keynesian-or-marxist-depression/).
Smith brings to ur attention one such Keynesian answer from Roger
Farmer, Professor of Economics in Los Angeles. I have referred to his
work before (https://thenextrecession.wordpress.com/2010/06/02/the-keynesian-answer-support-the-speculators/).
Farmer reckons that economies are driven by “animal spirits” i.e.
bursts of enthusiasm and depressions by capitalists to invest or not.
Apparently, all can be explained by the view that capitalists are really
suffering from you could call a ‘bipolar syndrome’. As Smith puts it: “A
burst of pessimism can knock the economy from a good equilibrium into a
bad one and it can then stay there until a burst of optimism comes
along to knock it back.” So, reckons Farmer, governments must step in to provide some stability to this fragile capitalist mentality.
Farmer’s policy prescription is for governments and central banks buy
up the stock market so that capitalists will be so pleased with this
that they will start investing. Well, stock markets round the major
economies are at record highs, thanks to cheap money injected by central
banks – and yet the world economy remains in sluggish mode and some
parts, like Japan and southern Europe are in ‘permanent recession’ or
Another right-wing economist has complained that the Keynesians are
far too optimistic about capitalist economies recovering with a
judicious bit of central bank quantitative easing and government
spending. John Taylor is also a West Coast professor and makes the point
that the US economic recovery has never been so weak, even worse than
the recovery after the deep double dip recession of the early 1980s (see
graph below) – and the US economy is doing the best out the major
advanced capitalist economies
As Taylor sarcastically described the US ‘recovery’: “At the time
of the first anniversary of current recovery in 2010, it showed clear
signs of weakness compared to the recovery from the recessions in the
early. By the recovery’s second anniversary in 2011, it was weak for
long enough that I called it a recovery in name only, so weak as to be
nonexistent. By the recovery’s third anniversary in 2012, it was now the
worst recovery from a deep recession in American history. By the
recovery’s fourth anniversary in 2013, few disputed any more that it was
unusually weak and disappointing. By the recovery’s fifth anniversary,
we were so far away from the recession that linking the terrible
performance to the recession became increasing far-fetched. With the
recovery now approaching its sixth anniversary, there is more optimism
that we are finally coming out the excruciating slow growth.”
The latest US GDP figures revised just yesterday for the fourth
quarter of 2014 show that average growth since 2009 has been just 2.2% a
year compared with 4.4% in the corresponding quarters of the 1980s
recovery. And as of January 2015, the employment-to-population ratio is
still lower than at the start of the recovery.
Both Mankiw and Taylor make these arguments because they want to
score points against the Obama administration and the Keynesian
economists who reckon that the government must intervene to help the
‘bipolar’ capitalist sector. Their argument is that ‘intervention’ just
makes things worse. Better to let capitalism cleanse itself of dead
capital, keep corporate taxes low and maintain ‘normal’ interest rates.
But this ‘liquidationist’ approach does not work either.
In a new paper, David Papell and Ruxandra Prodan, Professor of
Economics and Clinical Assistant Professor of Economics, respectively,
at the University of Houston, find that deep recessions after a
financial crash can take up to nine years before growth returns to
trend. But this time it is different – it’s even worse (http://econbrowser.com/archives/2015/02/guest-contribution-long-term-effects-of-the-great-recession).
Looking at the latest projections of the US Congressional Budget
Office (CBO), they reckon that US real GDP will never return to its
pre-Great Recession growth path. “The projected decrease in
potential GDP is unprecedented, as almost all postwar U.S. recessions,
postwar European recessions, slumps associated with European financial
crises, and even the Great Depression of the 1930s, were characterized
by an eventual return to potential GDP.”
US real GDP will permanently be 7.2% below the pre-Great Recession
growth path because trend real GDP continued to rise during the
recession. They call this a “purely permanent recession”. But
as readers of this blog will know, I characterise this as a Long
Depression, a rare event in capitalism. The CBO reckons that the US
trend growth rate will slow to just 1.7% and will never be above 2% a
year for the foreseeable future!
Why is capitalism locked into a depression? Well, mainstream
economics has debated this, swinging between two causes for this
‘secular stagnation’: permanently lower productivity growth and
innovation (Robert Gordon) or too high rate of interest or too low
‘animal spirits’ (Larry Summers) – see my post
In another paper just out, three economists find that long-run US
real GDP growth has been declining for some time and the main reason is a
slowdown in the growth of the productivity of labour (http://www.voxeu.org/article/tracking-gdp-when-long-run-growth-uncertain). Capitalists are failing to boost productivity growth enough through new technology.
And two more economists show that worker productivity in the major
economies has been persistently weak since the onset of the global
crisis (http://www.voxeu.org/article/labour-productivity-and-global-crisis-historical-perspective). “We
find that persistently weak productivity is not normally a feature of
financial crises in advanced economies – this time has been different.
Looking sector by sector, the biggest falls in most countries have been
in manufacturing. The UK stands out in having also seen a dramatic fall
in service sector productivity growth, now one of the slowest in our
sample of countries.”
It seems that capitalism is now in a permanent bipolar disorder – a long depression.
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