Written with Steve Matthews
Federal Reserve Chairman Ben S. Bernanke said last week that he believes the weak growth and high unemployment that the economy has witnessed since 2008 can be mostly fixed by monetary policy.
He told his audience in Jackson Hole, Wyoming, that “following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level” and that he sees “little evidence of substantial structural change in recent years.”
That puts him in in company of people like of former Fed vice chairman Alan Blinder, Goldman Sachs Group Inc. Chief Economist Jan Hatzius and Stanford University’s Edward Lazear, formerly George W. Bush’s chief economist.
One big-name dissenter?
Northwestern University’s Robert Gordon, who came out with a paper last month contending that U.S. growth may stall.
“Ben Bernanke should read my paper,” Gordon told Bloomberg.
His paper, published last week by the National Bureau of Economic Research, is entitled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.”
Gordon is one of the premier scholars on economic growth and sits on the National Bureau of Economic Research’s panel that dates the beginning and end of U.S. recessions. He argues that “the rapid progress made over the past 250 years could well turn out to be a unique episode in human history” and that the economic growth in that period may not repeat. Instead, long-run growth for the U.S. could slow to a terrifyingly low 0.2 percent, a rate at which it would take more than three centuries for gross domestic product to double.
At the core of his argument are six headwinds. First: a “demographic dividend” that has swung into reverse. Instead of a labor force growing from female participation, the percentage of working age people is shrinking as baby boomers retire.
Second: educational attainment has stalled, as the soaring cost of higher education is helping ensure that the next generation is no more educated than their parents. Third: rising inequality is preventing growing incomes from contributing to consumer well-being.
Fourth: globalization will continue to pressure U.S. wages as employers still have abundant sources of cheaper labor outside the United States. Fifth: the steps needed to address climate change could slow growth.
And finally: government debt will weigh on growth. That debt stood at $15.99 trillion as of Aug. 30 and should blip over the $16 trillion mark any minute. As “a matter of arithmetic,” Gordon writes, this debt can be whittled away with a mix of higher taxes, lower expenditures, and lower entitlement spending. And any way that’s slower growth.
Bernanke offered a different set of headwinds for growth in his remarks, including the housing market, state and local government cutbacks and clogged credit markets. Gordon says this is the wrong focus.
“All the weaknesses and headwinds that I discuss were evident in 2007 and cannot be blamed on housing, state and local government, or financial market problems,” Gordon said to Bloomberg. “Demographics, inequality, education, globalization, and energy/environment could be clearly identified as structural drags on growth in 2007. The only new problem since 2007 is the under-water mortgages and exploding federal debt.”
Says Gordon: “The factors Bernanke mentions are a drag on recovery of actual GDP back to potential GDP. But at the same time the headwinds and faltering innovation have slowed down the growth rate of potential GDP below anything we’ve seen in U.S. history back to 1929 or earlier.”