Are the Good Times Never Coming Back?

By BINYAMIN APPELBAUM

There is growing chatter in economics circles about the unsettling possibility that the nation may never recover completely from the recent recession. Recessions are generally regarded as abnormal disruptions and recoveries as inevitable returns to normalcy — in large part because that is how the economy has behaved for more than a century. Even after the Great Depression, growth returned to its long-term trend; it just took a while. The bleaker view – which remains, to be sure, the view of a distinct minority — is that the years before the recession were abnormally good, and that while the recession was abnormally bad, reality lies halfway in between.

The present situation, in other words, is about as good as it gets.

A paper that will be presented Thursday afternoon at a conference organized by the Brookings Institution is the latest contribution to this literature.

The paper, entitled “Disentangling the Channels of the 2007-2009 Recession,” will be posted on the general conference Web site Thursday afternoon.

The authors argue that the slow pace of recovery reflects a long-term deterioration in economic prospects. Specifically, they estimate that the trend growth rate of gross domestic product fell by 1.2 percentage points between 1965 and 2005.

The argument is well illustrated by these graphs from a recent speech on the same theme by James Bullard, president of the Federal Reserve Bank of St. Louis. The top graph compares growth over the last decade with the long-term trend. 

The bottom graph substitutes a gradually weakening trend line.

The economists who wrote the new paper, James Stock of Harvard and Mark Watson of Princeton, contend that the key reason for the faltering pace of growth is that the work force is expanding more slowly. Population growth has slowed, and so has the pace at which women are entering the labor market.

“These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case.”

Indeed, recent growth has actually outpaced their expectations.

“The current recovery in employment is actually faster than predicted,” they write. “The puzzle, if there is one, is why the recovery was as strong as it has been.”

This general theory about the power of women has been propounded before, notably by the economist Tyler Cowen in his recent book “The Great Stagnation.”

In the current context, however, it is also deployed as a rebuttal to the many economists who regard the slow recovery as a consequence of the unusual nature of the recession. One such view holds that financial crises are particularly traumatic. Another common theory holds that high levels of debt are restraining growth.

Both of these views carry the implication that the good times will return.

Professors Stock and Watson devote much of their paper to the argument, as they put it, “that the same six factors which explained previous postwar recessions also explain the 2007Q4 recession: no new ‘financial crisis’ factor is needed.”

In other words, the good times are over, and they are not coming back.

But curiously, the authors don’t seem convinced by their own argument, noting a bit later in the paper that they can’t exclude the possibility that new factors produced familiar effects. Indeed, they write, “At some level this must be so, as the Lehman collapse was unprecedented and the ‘Lehman shock’ was new; so too for TARP, the auto bailout, and the other extraordinary events of this recession.”

That’s quite a caveat, and it raises the obvious and important question of how they can be sure that new causes have not or will not produce new effects.

The good news: They’re right or wrong, and we’ll know soon enough