Catch 22 Recovery

/ Jim Luke

From UCLA: UCLA Anderson Forecast: U.S. recovery a long, slow climb; Calif. recovery weaker than nation’s (emphases mine):

“If the next year is going to bring exceptional growth,” [UCLA Anderson Forecast director Edward] Leamer writes, “consumers will need to express their optimism in the way that really counts — buying homes and cars. And that is not going to happen if businesses continue to express their pessimism in the way that really counts — by not hiring workers.”

The result is an economic Catch-22.

Leamer explains that significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

via Calculated Risk: UCLA’s Leamer: “A Homeless Recovery”.

This is actually not surprising unless one has never read Keynes.  It’s the kind of catch-22 that happens in a severe recession/depression.  The only ways to break out of it:

  1. Government increases spending – since most pols have (erroneously  concluded) that last year’s too-small stimulus proves govt spending doesn’t work, our politicians have ruled this option out.
  2. Dramatic increase in exports and reduction in imports – but since most nations are trying to do this and it was a global recession and all countries cannot be net exporters at the same time (who would buy all those exports?), this won’t happen.
  3. We wait for the gradual elimination of excess capacity:  we wait for workers to die or retire or emigrate and we wait for business machinery to deteriorate and then need to be replaced.

The coming decade is looking very grim without a change in policy.