The economy might stink for a while.
Writing in the New York Times this weekend, economist, author, and blogger Tyler Cowen says that we might need to get used to the idea that the economy will continue to underperform our expectations.
Cowen says that right now there are two core outlooks on the economy, both of which are inherently optimistic.
One says that things like low wage growth and low interest rates are phases that will pass, and the other is that we merely didn’t appreciate how long it would take to recover from the financial crisis.
But is it a foregone conclusion that things will just get back to “normal”?
There are some nuggets of truth in both of these arguments, but there is a much more disturbing possibility that could turn out to be more accurate: namely, that the recession was a learning experience that we haven’t fully absorbed. From this perspective, the radical and sudden changes of the financial crisis were early indicators of deep fragility and dysfunctionality.
Slowly but surely, we may be responding to these difficult revelations by scaling back our ambitions for the economy — reinforcing negative trends that were already underway. In this troubling view, we have finally begun to discover some unpleasant truths. Borrowing a phrase from the University of Toronto economist Richard Florida, it’s possible that we are experiencing a “Great Reset.”
A “Great Reset,” as Cowen lays out, is basically a period in which workers, employers, and policymakers slowly recalibrate what they can expect from the economic engine.
For example, during long periods in the 1980s, 1990s, and early 2000s, wages and GDP growth were somewhere between 4% and 6% per year. Right now, the economy is growing at around 2% a year, with wages growing a bit less than that.
And so the core debate in economics is whether we’re about to get back to that prior growth trend, or whether we’re facing a “new normal” (as Bill Gross has called it), or “secular stagnation” (a term used by Larry Summers and others to define a period of lower-than-expected economic growth).
As Cowen outlines, the current “reset” may largely have to do with wages. He notes that wages for recent college graduates have fallen about 7% since 2000, and cites research which suggests nothing matters more to your long-run earning power than what you make in your earliest jobs.
And if it is the case that the US economy is seeing the ground shift below it, Cowen says policy tweaks will only make an impact “at the margins.” Moreover, he says it might not even be wise to fight a reset.
Last week, we got a few more pieces of downbeat economic data.
A reading on consumer confidence from the University of Michigan plummeted, reflecting a waning belief from consumers that the long-expected economic rebound after a tough winter will actually come to fruition.
Additionally, the latest report on retail sales showed there was no growth in consumer spending in April. And this piece of data had some in markets throwing around the word “recession.”
So while the potential long-run economic challenges Cowen discusses aren’t necessarily quick reactions to recent economic data, the discussion surrounding the US economy has gotten more depressing.
And we might just need to get used to that.