This Is Not a Recovery

August 27, 2010

By PAUL KRUGMAN  NY Times Op-Ed Colmnist
Published: August 26, 2010What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned.
Fred R. Conrad/The New York Times

But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

The small sliver of truth in claims of continuing recovery is the fact that G.D.P. is still rising: we’re not in a classic recession, in which everything goes down. But so what?

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative.

All of this is obvious. Yet policy makers are in denial.

After its last monetary policy meeting, the Fed released a statement declaring that it “anticipates a gradual return to higher levels of resource utilization” — Fedspeak for falling unemployment. Nothing in the data supports that kind of optimism. Meanwhile, Tim Geithner, the Treasury secretary, says that “we’re on the road to recovery.” No, we aren’t.

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

In the case of the Fed, admitting that the economy isn’t recovering would put the institution under pressure to do more. And so far, at least, the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing, and settles for a recovery that isn’t.

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

So what should officials be doing, aside from telling the truth about the economy?

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Which of these options should policy makers pursue? If I had my way, all of them.

I know what some players both at the Fed and in the administration will say: they’ll warn about the risks of doing anything unconventional. But we’ve already seen the consequences of playing it safe, and waiting for recovery to happen all by itself: it’s landed us in what looks increasingly like a permanent state of stagnation and high unemployment. It’s time to admit that what we have now isn’t a recovery, and do whatever we can to change that situation.

 

By Neil Irwin

Friday, August 27, 2010; 11:06 AM

JACKSON HOLE, WYO. – Federal Reserve Chairman Ben S. Bernanke acknowledged in a much-awaited speech Friday that the pace of economic growth “recently appears somewhat less vigorous” than expected, and said that the central bank would take new steps to bolster the economy if conditions worsen.

“The pace of recovery in output and employment has slowed somewhat in recent months,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years.”

Just this morning, the Commerce Department reported that gross domestic product rose at only a 1.6 percent annual rate in the April-through-June quarter, much worse than the 2.4 percent earlier estimated.

Bernanke said that the Fed’s policy committee “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”

“The issue at this stage” Bernanke said, “is not whether we have the tools to help support economic activity and guard against disinflation. We do. . . . The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”

In other words, the economy has not deteriorated enough, nor the outlook changed enough, to warrant pulling out some big new monetary policy guns, but the Fed would be willing to do so if its forecast of continued slow-but-steady growth proves to be overly optimistic.

Bernanke enumerated the policy options on the table. At recent Fed policy meetings, he said, participants have discussed renewed large-scale purchases of Treasury bonds and other securities; pledging to keep the Fed’s short-term interest rate target near zero for even longer than analysts now expect; or cutting the rate paid on money that banks park at the Fed.

However, Bernanke explicitly rejected a notion, advanced by some economists outside the Fed, that the central bank temporarily increase its target for inflation. “I see no support for this option” on the Federal Open Market Committee, he said.

In discussing the trade-offs involved in undertaking a major new program to buy securities and thus expand the Fed’s balance sheet to try to boost growth, which is the most powerful of the tools under consideration, Bernanke noted various risks: that the central bank lacks precise knowledge of what effect the action would have; that the action would have the most impact in a time of financial market distress; and that the bigger balance sheet “could reduce public confidence in the Fed’s ability” to unwind the policies.

The speech is one of the most hotly anticipated of Bernanke’s tenure as Fed chairman, especially on Wall Street. In recent weeks, the economic situation has deteriorated markedly, and many forecasters now expect that the U.S. economy will grow much too slowly to bring down the unemployment rate in the second half of the year. Fed watchers were eager for Bernanke to offer clarity on what the approach of Fed policy is over the months ahead, particularly following an action at its Aug. 10 meeting to reinvest proceeds from maturing mortgage securities on its balance sheet.

In discussing the economy, Bernanke adopted a mixed tone, expressing confidence in growth over the medium term while acknowledging that the situation is disappointing at the moment. “In many countries, including the United States and most other industrial nations, growth during the past year has been too slow and joblessness remains too high,” he said.

“Incoming data on the labor market has been disappointing,” Bernanke added, while business investment in equipment and software “should continue to advance at a solid pace.”

The major drain on second-quarter gross domestic product was from trade. “Like others,” Bernanke said, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors.”

The revision to gross domestic product data Friday is only the latest reminder of how far the economic outlook has fallen. Just in the past week, new data have indicated that the housing sector was in near free-fall in July, that business orders for big-ticket equipment contracted that month, and that new claims for unemployment insurance benefits remained at recessionary levels last week.

Bernanke takes a measure of optimism from recent reports that Americans are saving more. Although a higher savings rate – about 6 percent, compared with the 4 percent earlier estimated – has helped depress consumption in recent months, in the longer term, he said, it “implies greater progress in the repair of household balance sheets,” which should in turn allow Americans to increase their spending more rapidly in the future.

In the speech, Bernanke made an effort to try to dissuade listeners from the idea that the Fed, or any central bank, can create a return to prosperity on its own. “A return to strong and stable economic growth will require appropriate and effective response from economic policymakers across a wide spectrum, as well as from leaders in the private sector,” he said. “Central bankers alone cannot solve the world’s economic problems.”