We Have a Failure of Economic Vocabulary
Among our problems is a failure of economic language. We lack the words and concepts to describe observable reality. By conventional wisdom, the Great Recession is long over. "Recession" connotes shrinking output. "Expansion" signifies the opposite. That's how the National Bureau of Economic Research, a group of academic economists, defines business cycles. Following this logic, the bureau determined the economy stopped contracting in mid-2009. Yet, most Americans - 53 percent, says a recent National Journal/Allstate survey - think we're still in recession, by which they doubtlessly mean "bad times."
Who is to say they're wrong? After all, the unemployment rate has exceeded 7 percent for almost five years, despite the withdrawal of millions of discouraged workers from the labor force. Moreover, public attitudes have become deeply pessimistic in ways apparently unprecedented since World War II. In past recessions, more than half of Americans believed their incomes would grow in the next year. Not this time. The share expecting gains collapsed to less than 45 percent after 2008 and is still below half, finds a study by Federal Reserve economist Claudia Sahm. The despondency, she writes, may signal a permanent shift in consumer psychology that undermines recovery.
Something's changed, but our economic vocabulary hasn't kept up.
This hasn't always been true. Language sometimes adapts. In the 1970s, the simultaneous emergence of high inflation and high unemployment - contradicting the then-accepted theory that an increase in one would cause a decrease in the other - inspired the term "stagflation" and the notorious "misery index." (The misery index added inflation and unemployment. A 6 percent unemployment rate plus 6 percent inflation moved the index to 12. In 1979 and 1980, it hovered near 20.)
The economist and New York Times columnist Paul Krugman recently suggested that "depression-like conditions" might persist "for decades." I think "depression" is too strong. To be fair, it's a term of art. There's no strict or universally accepted definition. Depression means whatever people say it means. To me, it involves a long period of widespread distress, characterized by continuous double-digit unemployment.
By this standard, the United States isn't near a depression. Granting the disappointments, the economy is still growing (7 million jobs since February 2010), and unemployment touched double-digits in only one month (October 2009 at 10 percent). This is nothing like the 1930s, when - despite a strong mid-decade recovery - the non-farm unemployment rate peaked at 32 percent in 1932 and averaged 20 percent. Note, however, that my standard does put some European countries in depression. At last count, the unemployment rate was about 28 percent in Greece, 27 percent in Spain and 16 percent in Portugal. The odds that these rates will soon decline sharply are slim to none.
"Secular stagnation" has also enjoyed a revival. Conceived in the 1930s, it aimed to explain why the Great Depression had lasted so long. The reason, argued Harvard economist Alvin Hansen in a famous 1938 lecture, was a loss of investment opportunities. Population growth was slowing. The American frontier had been opened. These sources of business investment had evaporated, while technological advances - another spur to investment - had weakened since the earlier railroad and automobile booms.
What resulted, said Hansen, were "Sick recoveries which die in their infancy . . . and leave a hard and seemingly immovable core of unemployment."
In a recent lecture, former Treasury secretary Lawrence Summers evoked secular stagnation - a "chronic and systemic" economic sluggishness, he said. Krugman, Martin Wolf, the Financial Times' chief economic commentator, and others also embrace the theme. There is an "investment dearth," Wolf recently wrote. Low interest rates suggest that there are "more savings searching for productive investments than there [are] productive investments."
Why? Unlike Hansen, today's stagnationists haven't identified causes. The problem might not be a dearth of investments so much as a surplus of risk aversion. For that, candidates abound: the traumatic impact of the Great Recession on confidence; a backlash against globalization, reduced cross-border investments by multinational firms; uncertain government policies; aging societies burdened by diminishing innovation and costly welfare states.
Whatever the cause, we are in unfamiliar territory. Some years ago, I coined the clunky phrase "affluent deprivation" to describe our condition. By any historical measure, we are - and will remain - a rich society. Hence, the affluence. But we may feel poorer, "deprived," because the economy no longer satisfies broad private and public wants, including an expectation of economic stability.
Getting the right words to match reality is hard. Secular stagnation is a warning. In the 1930s, it seemed a plausible theory backed by ample evidence. After World War II, it was destroyed by events: a population explosion (the "baby boom"), a new frontier (suburbia), and new technologies (television, jet travel, computers). There was no stagnation. Just the opposite.