Since the first rumblings of the financial crisis, in 2007, people have comforted themselves by looking back to the Great Depression and thinking about how much worse things could be. It’s true, too. Our modern economic crisis has been far less severe than the Depression.
Yet our crisis isn’t over. By almost any measure – employment, income, net worth, total output – the economy is still suffering. And now a grim milestone is coming into view.
By 2019, a prime measure of the economy’s health – gross domestic product per working-age adult – will likely have recovered less in the 12 years since the crisis began than it did during the 12 years since the start of the Great Depression. When I saw a chart making this point, in a new paper from Olivier Blanchard and Larry Summers, I was stunned.
Gross domestic product, or GDP, measures the nation’s total output, which largely determines its standard of living. And the decline in output during the Depression was clearly much worse than in recent years. But the economy eventually bounced back, first with rapid growth in the mid-1930s and then during the war mobilization of the early 1940s.
This time, the country never suffered 25 percent unemployment or nearly the same amount of misery – thank goodness – but it has endured years of weak growth following the crisis.
By 2019, GDP per working-age adult is likely to be only 11 percent higher than when the crisis began (barring an unexpected growth surge or a recession). That’s a miserable growth rate over an extended period. Yes, the economy has done fairly well for last year or two, but not nearly well enough to make up for the long slump, especially because growth was also mediocre in the early 2000s. No wonder so many Americans are angry and frustrated.
In their paper, Blanchard (a former chief economist at the International Monetary Fund) and Summers (a former Treasury secretary and White House adviser) argue that it’s time for the country to take its long malaise more seriously. How? Economists should question long-held assumptions, as they did after both the Depression and the 1970s stagflation. The Federal Reserve – which has repeatedly underestimated the economy’s weakness – should consider bolder policies, like raising inflation. Congress and the White House should consider spending more money to create decent-paying jobs, despite legitimate concerns about the federal debt.
Instead, many policymakers and economists continue to operate as if the Great Recession never happened and their prior beliefs still hold. They grew up believing that the big economic risk was an overheated economy, because that was the great problem of the 1970s. As a result, many are obsessed with the dangers of high inflation and large budget deficits. And those dangers are real – but they’re not the main dangers facing the economy now.
“Having too little demand,” as Summers says, “is now as much of a problem as having too much demand.”
Economists sometime use a rubber band as a metaphor for the economy. The further it’s pulled in one direction, the more strongly it snaps back in the other. The metaphor was apt in the 1930s. But it’s not apt now. After the worst downturn in 70 years, the U.S. economy – like much of the world’s – has been plagued by mediocre growth.
There is no reason to accept mediocrity as the new normal.