Sunday, August 6, 2017

J. W. Mason on "What Recovery?"

I believe J. W. Mason's recent Monetary Policy Report for the Roosevelt Institute entitled "What Recovery?" is a very important paper on employment, wages, productivity and GDP growth.  It should be read by as many people as possible.

The Executive Summary reads:"This paper critically examines the widely held view that the U.S. economy is today operating at close to potential. The paper makes five core arguments. First, GDP
remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10 percent below the Congressional Budget Office’s (CBO) 2006 forecast, and shows no signs of returning to the predicted level. Second, the fall in the employment-population ratio over the past decade is not due to demographics. At most, 40 percent can be attributed to the aging population, while the remainder represents declining employment rates within age groups, particularly younger ones. Third, the exceptionally slow productivity growth of the past decade can be understood as the result of weak demand, including the equally exceptionally weak growth of investment spending.  Fourth, while individual pieces of the macroeconomic picture might seem to have supply-side explanations, the overall picture is difficult to square with a story of exogenous fall in the economy’s productive potential. This combination of weak output growth, low inflation,slow wage growth and low interest rates is a textbook result of a negative demand shock,but is much harder to square with a fall in supply. And fifth, under current conditions, the costs of underestimating potential output are much greater than the costs of overestimating it. Under current conditions, higher inflation and a rising wage share are arguably desirable; or at least should be considered much less costly than the stagnant incomes,underemployment and waste of productive resources that will result from underestimating potential output." 

J. W. Mason has provided further reading and notes in a recent blog post which are well worth attention.

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