Goolsbee advises that “Washington won’t save us,” but transformation of the economy will
The Department of Economics hosted economist Austan Goolsbee to deliver a lecture entitled “Are we doomed? And if so, how soon?” Goolsbee is the Robert P. Gwinn Professor of Economics at the University of Chicago’s Booth School of Business and former Chairman of the Council of Economic Advisers under President Barack Obama.
Goolsbee began the lecture by answering the question posed in its title. He declared that America’s economy is “doomed” in the short run but will ultimately be fine in the long run.
Following a recession, the economy typically bounces back in what is called a “V-shaped” recovery, called such because of its appearance on a graph. The Great Recession was the worst downturn America has experienced since the Great Depression, and the economy has recovered slowly, leading some to suspect the recovery is “U-shaped” rather than “V-shaped.”
The conventional wisdom holds that growth will accelerate as deleveraging, or the selling of assets, slows down. According to this conventional wisdom, the economy usually takes about seven years to recover fully from a recession. This leads some to believe that economic growth is going to take off soon, as it has been about seven years since the end of the Great Recession.
Goolsbee argued that these predictions of upcoming growth, forecasted by the Federal Reserve Board and other economists, are built on a broken model.
“I believe they have embodied in their model an implicit return to normal, where in their mind what is normal, they perhaps don’t realize it, but it’s defined as what it was in 2006,” he stated. Failures of such broken models to accurately track real-world data as it develops are then explained away by pointing to factors outside the model, such as unusual or unseasonal weather or natural disasters.
Goolsbee went on to explain that the reason economic recovery is not occurring in a V-shape is because the two things that led to economic growth in the early 2000s were consumer spending, which was growing faster than income was growing, and housing investment. Those two things cannot be replicated now because they are not sustainable in the long run.
Goolsbee stated, “The basic short-run problem facing the U.S. economy is transformation; transforming from what we were doing to something new, and that’s never a fast process, and that’s never an easy process.”
The solution, he proposed, involves a mix of people moving from slower-growing states to states with higher growth, retraining workers, and more export and capital investment growth.
“I don’t think oil can save us, the world can save us, consumers can save us, or housing can save us; there is a small group of totally insane people who say, ‘Well, then Washington should save us.’ I don’t know what planet these guys are on,” Goolsbee said.
He explained that Washington is essentially deadlocked until January of 2017, and little will be done politically until that time. Goolsbee clarified that this was the best case scenario, as there is a small probability that Washington will do something worse than nothing, such as default on the debt, in the intervening months.
“There is a group of very senior economists who are now saying forget about the next two years, for the next 20 years we are in a period of secular stagnation, new normal. Get yourself used to disappointment. That’s the basic message and they have different rationales,” Goolsbee said.
The two main rationales are aging demographics and diminishing opportunities for innovation. Goolsbee says these two rationales are wrong for several reasons.
The aging demographics rationale is wrong because the U.S. population is projected to keep growing to surpass 400 million people, while most other countries’ populations are either shrinking or about to start shrinking in the next decade.
Goolsbee explained that the U.S. has the most productive workforce of any major economy, and therefore the diminishing productivity rationale is also wrong.
“The innovative capacity of everybody, of human beings, but especially of the American economy, has proved completely unbounded and nothing about that changed in the last seven years to make you think that it’s not,” Goolsbee said.
Therefore, Goolsbee concluded, the secular stagnationists are wrong and there is reason for optimism.
Sophomore Adam Battalio offered his thoughts on the lecture to the Rover. “I thought on top of him being a really fantastic speaker he brought out a really important point that we’re overly pessimistic about our economy and that while a lot of things are going wrong, there are big things going right, specifically productivity and innovation,” Battalio said.
Matt Connell is a freshman studying political science and economics. He is currently in despair over the state of the presidential election. You can contact him with encouragement at firstname.lastname@example.org.