Mainly Quotes, Predictions and Explanation from Bernanke
The encouraging news is that the headwinds I have mentioned may now be abating. Near-term fiscal policy at the federal level remains restrictive, but the degree of restraint on economic growth seems likely to lessen somewhat in 2014 and even more so in 2015; meanwhile, the budgetary situations of state and local governments have improved, reducing the need for further sharp cuts. The aftereffects of the housing bust also appear to have waned. For example, notwithstanding the effects of somewhat higher mortgage rates, house prices have rebounded, with one consequence being that the number of homeowners with “underwater” mortgages has dropped significantly, as have foreclosures and mortgage delinquencies. Household balance sheets have strengthened considerably, with wealth and income rising and the household debt-service burden at its lowest level in decades. Partly as a result of households’ improved finances, lending standards to households are showing signs of easing, though potential mortgage borrowers still face impediments. Businesses, especially larger ones, are also in good financial shape. The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters. But, of course, if the experience of the past few years teaches us anything, it is that we should be cautious in our forecasts.
What about the rest of the world? The U.S. recovery appears to be somewhat ahead of those of most other advanced industrial economies; for example, real GDP is still slightly below its pre-recession peak in Japan and remains 2 percent and 3 percent below pre-recession peaks in the United Kingdom and the euro area, respectively. Nevertheless, I see some grounds for cautious optimism abroad as well. As in the United States, central banks in other advanced economies have taken significant steps to strengthen financial systems and to provide policy accommodation.
Mystery of wages lagging productivity growth solved. Recalc shows Productivity Growth was weaker too
Worker productivity growth has been below 2% in five of the past seven years after a long-run above 3%.
“Disappointing productivity growth,” Bernanke said, “must be added to the list of reasons that economic growth has been slower than hoped.” Unlike the other reasons—the faltering Euro, for instance, or ill-timed state and federal spending cuts—weak productivity growth was an unknown factor until this past November, when earlier data were recalculated—“an illustration,” Bernanke said, “of the frustrations of real-time policymaking.”
Because of weak productivity growth—that is, weak growth in output per worker per hour—Gross Domestic Product is about 7% below where it should be, according to Fed economists.
Until the recent data revision, productivity growth was one of the long-term bright spots in the economy. After tanking between 1973 and 1995, productivity growth rebounded to levels comparable to the booming post-World War II years, probably because of efficiencies generated by the World Wide Web. Nobody worried that productivity growth was too slow; instead, many worried that median income growth wasn’t keeping up with productivity growth, as it had during the postwar boom. (Indeed, in almost every year since 1999, pre-tax median household income has been declining.)
Rising productivity growth unaccompanied by a comparable rise in incomes for the typical American family is a problem. But slackening productivity growth creates a different problem: it limits the extent to which, even theoretically, wages can rise.
Although the Federal Reserve, like other forecasters, has tended to be overoptimistic in its forecasts of real GDP during this recovery, we have also, at times, been too pessimistic in our forecasts of the unemployment rate. For example, over the past year unemployment has declined notably more quickly than we or other forecasters expected, even as GDP growth was moderately lower than expected a year ago. This discrepancy reflects a number of factors, including declines in participation, but an important reason is the slow growth of productivity during this recovery; intuitively, when productivity gains are limited, firms need more workers even if demand is growing slowly. Disappointing productivity growth accordingly must be added to the list of reasons that economic growth has been slower than hoped. (Incidentally, the slow pace of productivity gains early in the recovery was not evident until well after the fact because of large data revisions–an illustration of the frustrations of real-time policymaking.) The reasons for weak productivity growth are not entirely clear: It may be a result of the severity of the financial crisis, for example, if tight credit conditions have inhibited innovation, productivity-improving investments, and the formation of new firms; or it may simply reflect slow growth in sales, which have led firms to use capital and labor less intensively, or even mismeasurement. Notably, productivity growth has also flagged in a number of foreign economies that were hard-hit by the financial crisis. Yet another possibility is weak productivity growth reflects longer-term trends largely unrelated to the recession. Obviously, the resolution of the productivity puzzle will be important in shaping our expectations for longer-term growth.
To this list of reasons for the slow recovery–the effects of the financial crisis, problems in the housing and mortgage markets, weaker-than-expected productivity growth, and events in Europe and elsewhere–I would add one more significant factor–namely, fiscal policy. Federal fiscal policy was expansionary in 2009 and 2010.18 Since that time, however, federal fiscal policy has turned quite restrictive; according to the Congressional Budget Office, tax increases and spending cuts likely lowered output growth in 2013 by as much as 1-1/2 percentage points. In addition, throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues. To illustrate the extent of fiscal tightness, at the current point in the recovery from the 2001 recession, employment at all levels of government had increased by nearly 600,000 workers; in contrast, in the current recovery, government employment has declined by more than 700,000 jobs, a net difference of more than 1.3 million jobs. There have been corresponding cuts in government investment, in infrastructure for example, as well as increases in taxes and reductions in transfers.
Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be. But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth.