Don’t Worry, I’m An Economist!

Ever because the financial meltdown of 2007-2009 and its own following (slow and moderate) recovery many have claimed the world has got into into circumstances of long-term stagnation. We all know the tale. I, for just one, have told it often on the blog (see here, here, here, here, here, here or here). After the financial crisis, which usually will cause continuous and slow recoveries, many governments followed stimulus and bailout programs in ’09 2009 that but demolished their public finances at that time.

In retrospect this was a textbook Keynesian solution in times of crisis – to be able to restore confidence and replace having less private sector investment the Federal government should step in and provide as much liquidity and stimulus as you can. And the majority of them did. THE UNITED STATES, the UK, almost all European countries, even some Parts of Asia (like China) were pressured to look at stimulus packages as an immediate response to improve confidence. Furthermore, central banks do their part and lowered rates of interest to historical lows to provide the essential liquidity to the banking sector (whose response was mainly to hoard this cash, not let it flow in the machine).

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But this doesn’t work, the conventional wisdom shows us, since you can only just lower rates so much, forcing one to fall under a liquidity snare. And the thing that can get you out of a liquidity trap is more government spending. This solution was applied throughout. And its own main consequence, in only a single year, was that personal debt levels have risen sharply (to be fair bank bailouts added to rising debt levels even more).

They almost doubled in the US and in the united kingdom, as in many European countries, while in countries like Iceland and Ireland they quadrupled. Budget deficits proceeded to go haywire also. The UK in 2010 2010 had the 3rd biggest deficit in the world: -10% of GDP (behind only the revolution-undergoing Egypt and the shambolic Greece). Even for rich and usually fiscally accountable countries like the US or the united kingdom, this is too much.

The gradual recovery is only part of a longer pattern of stagnation? To be able to understand the big picture of why the recovery was so sluggish, we must go through the trends which have occurred before the crisis. Many declare the stagnation (especially in efficiency and real wages) started a long time before.

The first graph talks about the decline in the growth rate of total factor productivity (TFP) in America, in accordance with its 1947-1973 pattern. Natural logs are accustomed to emphasize the comparative stagnation of TFP. Knowing that efficiency rise dropped short of its trend-based anticipations, it is all the more striking to start to see the relative stagnation of real income before 30-40 years.

So what exactly are the structural factors accountable for this 30-year long period of comparative stagnation in productivity and real income? Are these structural factors the same ones disabling our economies from fully recovering from the recent problems? Economists came up with several competing hypotheses, each very interesting in its own way. I am going to briefly present five of them.