The U.S. Economic Recovery: Why so weak and what should be done? William J. Crowder Ph.D.

Transcription

1 The U.S. Economic Recovery: Why so weak and what should be done? William J. Crowder Ph.D.

2 Weak Recovery? It s no secret that the U.S. economy has still not fully recovered from the financial crisis and subsequent recession. The economic expansion following the 2007 recession has been the weakest of the post World War II era and remains an outlier among postwar recoveries along several dimensions.

3 Real GDP Growth Cumulative Change in Real GDP from Peak 30% 25% 20% 15% 10% 5% 0% -5% Quarters After Peak

4 Real GDP Growth Quarters After Peak AVG 2007 Cumulative Change in Real GDP from Peak

5 Real GDP Growth Quarters After Peak AVG Cumulative Change in Real GDP from Peak

6 The Deeper the Plunge -5-4 * Depth of Recession YearCumulative GDP Growth

7 Recoveries Following Financial Crises Source: John Taylor,

8 The Labor Market Story is Just as Bad Year Employment Growth Average of 10 Previous Recoveries 4 Year Employment Growth since June 2009

9 % of Population Employed

10 Well Below Potential

11 Why So Bad This Time? Housing Wealth Decline Lower Government Spending Weak Investment Spending

12 Why So Bad This Time? Housing Wealth Decline Lower Government Spending Weak Investment Spending

13 The Housing Market Trend Housing Price Housing Price Index (log scale)

14 Household Consumption Real Personal Consumption (log scale) Trend Consumption

15 The Housing Market Case-Shiller Home Price Index Date

16 Why So Bad This Time? Housing Wealth Decline Lower Government Spending Weak Investment Spending

17 Federal Government Purchases of Goods and Services Federal Gov't Purchases as Percentage of GDP Trend in Federal Purchases ( )

18 Federal Government Transfer Payments Federal Gov't Transfers as Percentage of GDP Trend in Federal Transfers ( )

19 Federal Government Interest Payments Federal Gov't Interest Payments as Percentage of GDP Trend in Federal Interest Payments ( )

20 When Interest Rates Rise Interest Payments on Federal Debt if Average Interest Rate is 5% Actual Interest Payments on Federal Debt

21 Why So Bad This Time? Housing Wealth Decline Lower Government Spending Weak Investment Spending

22 Investment Spending Real Gross Private Domestic Investment (log scale) Trend Investment ( )

23 How Important is Investment?

24 Household Consumption Real Personal Consumption (log scale) Trend Consumption

25 Non-Durable Consumption % of Disposable Income Trend in Non-Durables plus Services Consumption Relative to Disposable Income Consumption Spending on Non-Durables and Services Relative to Disposable Income

26 Consumption of Durables % of Disposable Income Average Durables Consumption Relative to Disposable Income Consumption Spending on Durables Relative to Disposable Income

27 What Role for Monetary Policy? The Taylor rule Proposed by Stanford Economics Professor John Taylor and specifies an optimal rule for setting the Fed s federal funds rate target. Such policy rules alleviate the time inconsistency problem.

28 The Taylor Rule Taylor Rule Interest Rate Actual Federal Funds Interest Rate

29 What Role for Monetary Policy? The money supply depends on three factors Currency holdings by the public, c. Excess reserve holdings by banks, e. The Fed s supply of base money through open market operations, MB.

30 What Role for Monetary Policy? When the public decides to hold more of its money in currency rather than in deposits the overall money supply shrinks. When banks hold more of their excess reserves rather than lend them out, the money supply shrinks.

31 Some Historical Perspective

32 Excess Reserves Ratio and Currency Ratio,

33 M1 and the Monetary Base,

34 Excess Reserves Ratio and Currency Ratio,

35 M1 and the Monetary Base,

36 Deflation v. Inflation When the money supply is allowed to decrease, the result is deflation. Prices actually begin to fall over time. Deflation is much more pernicious than inflation. If the Fed errs, it will be on the side of inflation.

37 Low Interest Rates The historically low interest rates not only helps counteract deflation but also encourages intertemporal substitution by households. By making current consumption cheap relative to future consumption, the Fed is distorting the decision making of households away from the future and towards the present

38 Optimal Consumption Consumption tomorrow C 2 -(1+r) IC 0 C 1 Consumption today

39 Fed Lowers Interest Rate to Increase Current Consumption Consumption tomorrow C 2 -(1+r) IC 2 0 C 1 Consumption today

40 Credit Constrained Households Consumption tomorrow 0 Consumption today

41 Three Structural Challenges NICs and the globalization of the labor market Deficits and demographics Technology and labor

42 Three Structural Challenges NICs and the globalization of the labor market Deficits and demographics Technology and labor

43 Three Structural Challenges NICs and the globalization of the labor market Deficits and demographics Technology and labor

44 Three Structural Challenges NICs and the globalization of the labor market Deficits and demographics Technology and labor