How long will this last?

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Will the U.S. Ever Grow Fast Again?

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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We normally assume that most recessions end in due time, and that the U.S. economy returns to its old trend even after an extended slump. George Mason University economist and blogger Tyler Cowen, writing in the New York Times’ Upshot blog, worries that this time is different:

It is hard to avoid the feeling that our current economic problems are more than just a cyclical downturn...[T]he radical and sudden changes of the financial crisis [may have been] early indicators of deep fragility and dysfunctionality...[W]e may be watching the slow unfolding of a hand that, in its fundamentals, has already been dealt.

I have a few problems with this idea. 

First, Cowen posits that some sort of deep, underlying shift has permanently lowered our economic potential. But has it lowered the level of gross domestic product, or its trend growth rate? This isn't made clear. The latter would be much, much worse than the former. A permanent shock to the level of GDP would mean that the damage from the recession would leave a permanent scar, but that our economy would someday resume growing at something like its old rate. But a permanent downward shock to the GDP trend would mean our economic growth would be slower in the future, eventually pushing us out of the first world and into the ranks of the middle-income countries. 

Are we talking about a permanent scar that the U.S. can live with, or economic apocalypse? 

My second problem is the question of why we might be experiencing a Great Reset, a term coined by University of Toronto economist Richard Florida. There are many theories for why the Great Recession (note that every event in macroeconomics is now labeled “Great”) might have left a scar. Workers, spending a long time unemployed, may have lost their skills and work ethic. Or there might have been a permanent reduction in productivity, or a permanent worsening of government policy. As for a permanent downturn in the economic growth trend, that would fit with Larry Summers’ idea of secular stagnation. 

But most of these are problems that are at least somewhat correctible by policy. If workers have suffered from a long spell of unemployment, give them some make-work jobs to get them back in shape. If you have secular stagnation, have the Federal Reserve raise its long-term inflation target. And so on. But Cowen hypothesizes that this Great Reset might be something that policy can’t address:

If a reset is underway, we might have to accept that public policy cannot reverse it easily. Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again.

The problem is, we just don’t know what these “economic structures” are, or why they are failing, or why they didn’t fail before. The word “structure” is often used as a label for a mysterious, unidentified, but presumably very powerful force. But simply giving a label to hypothesized forces isn't satisfying. You can only test a hypothesis if it’s properly specified. To know whether we’ve experienced a Great Reset, we’ve got to define exactly what the theory of a Great Reset predicts, and also articulate a mechanism. 

My third problem with the Great Reset theory is that there aren’t many historical examples of countries permanently shifting to slower growth. There are a few -- Argentina used to be counted among the world’s affluent countries, but sustained poor economic policy and (probably) isolation from global supply chains steadily eroded its status, until it is now a middle-income country. But usually, countries bounce back from the big shocks, even if it takes a decade or more. 

Take Japan, for instance. The 1990s truly were a lost decade. But since 2000, Japan’s real GDP per working-age person has outperformed that of the U.S. or Europe.  The U.S. Great Depression probably looked like a Great Reset to many, as did the stagnation of the 1970s, but both of those turned out to be temporary. And most European and East Asian countries have resumed something akin to their old growth trend, even after substantial shocks. 

So the Great Reset hypothesis isn't clearly specified, doesn’t include an underlying mechanism and runs counter to much of the experience of history. It really just amounts to a worry that something big has shifted under our feet, and that things will be bad in years to come. That worry may even be well-founded -- there are certainly plenty of things we don’t understand about the macroeconomy and its “structures.” Empires decline, golden ages do end. 

But that shouldn't discourage us from trying policy fixes. If creeping doom is inevitable, then so be it, but there’s no reason not to try our best to avert it.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net