BOSTON (MNI) – The following is the second of three sections of the
remarks of Boston Federal Reserve Bank Pres. Eric Rosengren prepared for
the South Shore Chamber of Commerce Thursday:
Causes of Slow Growth in the United States
Exploring in detail the many possible causes of slow growth in the
current economy is beyond the scope of this talk. But let me just
highlight some important factors. Figure 3 shows, and compares, the
growth rates of real GDP and real GDP excluding residential investment
(housing) and government spending. As the chart shows, there is a
notable difference in the growth rates. While real GDP has grown only by
2.21 percent, real GDP excluding housing and government spending grew by
2.45 percent. Had the economy not had the headwinds from government and
housing dragging growth lower — had it grown just by that higher rate
of 2.45 percent over the three years of the recovery — outcomes would
be somewhat better. However, normally a sector like housing would be
expected to grow much more quickly than other sectors of the economy in
the early stages of a recovery — given housing’s interest-rate
sensitivity — and thus we would expect it to provide more impetus to
overall economic growth. To consider the role of housing a bit more,
Figure 4 shows housing starts from 2000 onward. The decline in housing
starts is striking, and unlike in most other recoveries the housing
sector did not participate in the initial stages of the current recovery
— although there has been some improvement recently.
However, I think there are some reasons to believe the recent
nascent signs of a housing recovery might be durable. Since the onset of
the housing bust the population has grown and per capita income has
grown, while interest rates are very low and prices are more affordable.
These are all positives when it comes to having potential buyers ready
to purchase homes.
These circumstances make it an important time for policymakers to
consider additional stimulus to the housing market to finally induce
progress. Consider the market psychology: if home buyers feel that house
prices are on the rise (as many indicators suggest), and that mortgage
rates will only remain this low temporarily, we could see new home
buyers come off the sidelines and commit to purchase new homes before
rates rise and before house prices rise further than they have.
Also, Figure 5 shows growth in state and local government spending
since 2000 and highlights that it has been unusually weak in this
recovery. This is, in large part, a result of state and local
governments pulling back in response to greatly diminished revenues – a
direct consequence of the depth of the recession and the weakness of the
recovery. Many states were prepared for a revenue shortfall, having
accumulated “rainy day” funds, but the long downturn sapped those funds.
Since nationally, the sum of state and local government spending is
larger than federal spending3, the net impact has been that
government-sector spending has been a significant drag on growth during
the recovery.
Figure 6 highlights another force dragging on the U.S. recovery,
the global economic slowdown. Many advanced economies experienced a
deeper recession (as measured by output) than did the United States, and
countries such as the U.K., France, and Japan have real GDP levels
indexed below where they were at the end of 2007, an even weaker rebound
than in the United States. Furthermore, in the last several quarters
several of the advanced economies in Europe have actually been in
decline as they have slashed their government spending.
Costs of a Slow Recovery
A slow recovery can have significant costs. Allow me to show you
some charts that are compelling — acknowledging, of course, that charts
cannot convey the human toll of the situation they depict.
Figure 7 shows the ratio of employment to population, which has
remained very flat during the recovery. This is consistent with the
growth in GDP being only about 2 percent — which is enough to keep up
with the growth in productivity and the labor force but not leading to
the employment of a larger percent of the population. By the way, while
there have been some demographic shifts within the workforce that might
explain some decline in the employment-to-population ratio, they do not
explain the trend in Figure 7; indeed, a very similar pattern emerges
when looking at the employment-topopulation ratio for particular age
groups.
Figure 8 shows one of the painful and unusual features of this
recession and recovery, the very elevated percentage of the unemployed
who have been out of work for more than six months. Unlike the deep
recession in 1982, in which there was a quick recovery and as a result a
relatively small and short-lived increase in long-duration unemployment,
the last recession and long, weak recovery have resulted in
substantially more people suffering long spells of unemployment. Long
periods of unemployment frequently deplete the savings of the
unemployed, make re-employment harder (as employers may be tentative
about hiring those who have been unemployed for long periods of time),
and may lead to skills becoming less than current. These problems
highlight why it is important to generate faster growth to avoid what
some call labor market “scarring” – where long-duration unemployment
becomes ingrained into our labor market.
What Should Monetary Policymakers Do?
The Great Stagnation in Japan did lead to a monetary policy
response from the Japanese central bank. The Bank of Japan eased rates
until they hit the zero lower bound, and then as Figure 9 shows, began
to gradually expand the assets of the central bank. However, there were
key differences from the policy actions we have taken at the Federal
Reserve. The Bank of Japan only gradually expanded the assets on its
balance sheet, and only after a delay of a number of years. Many of its
purchases were of shortterm securities, which had little impact on
already-low short-term rates. This is in contrast to the impact that the
U.S. Federal Reserve’s purchases of longer-duration assets have had on
longer-term rates, which remain well above zero and thus have room to
decline.
Finally, the Japanese central bank may in my view have prematurely
stopped the growth in their balance sheet, considering the weakness in
the Japanese economy at the time. As a result, the Japanese economy has
remained stagnant and despite having an expanded balance sheet for an
extended period, the Japanese continue to struggle with a deflation
problem rather than an inflation problem, as the bottom chart on Figure
9 shows.
Turning to the U.S., the differences in policy are quite striking.
There was a rapid expansion of the Fed’s balance sheet (see Figure 10),
as well as a fiscal stimulus. This may be why we have not experienced a
significant decline in the trend growth rate in the economy, seen in an
earlier chart. There has also been a focus on bringing long-term
interest rates down, and more recently on utilizing monetary policy
communication strategies to convey that rates will likely remain low
until the recovery and labor markets show a more sustained improvement.
To reiterate, a key difference is that we didn’t hesitate (by
years) to take significant actions in the U.S. And when we took actions,
they were forceful. And going forward, we also don’t want to make the
mistake of retreating at the first, early signs of improvement. Japan’s
experience suggests one must continue until improvement is sustainable
and will persist.
However, despite these differences there is an important similarity
between our situation and Japan’s, as well. Just as Japan has not
experienced inflation despite a rapid expansion of their balance sheet,
our measure of inflation (the personal consumption expenditure deflator)
is currently only 1.3 percent through July despite our balance sheet
expanding significantly four years ago (see the bottom chart on Figure
10).
-more- (2 of 3)
** MNI **
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