In Our Economic “New Normal” Chronic Under Performance Is OK
WASHINGTON – The most distressing outcome of the deep global recession of 2008-2009, and subsequent anemic recovery, is that now we have become accustomed to quasi-stagnation as the “new normal”. Indeed, feeble economic growth and historically high unemployment are considered ok. Not optimal, but tolerable.
4% second quarter growth
In the US we have saluted the second quarter (April-May-June) 4% GDP growth as some kind of historic turnaround, evidence that we are finally seeing a real American come back. Of course, 4% GDP growth is very good.
However, if you put this statistic in context, the overall picture is not that great. In the first quarter, GDP was actually negative: -2%. So, if you average the two quarters and look at GDP growth for the first 6 months of 2014, you get +1%. Hardly spectacular.
Of course, if we could continue on a 4%, or at least 3% growth quarter after quarter, this would be an entirely different story. This would mean that we have reverted to the American 3% growth post war average.
America used to have a 3% growth
To most people all this may not mean much. However, the difference between 2% and 3% growth, year after year, is really significant. It means an economy that grows 30% less than it could, year after year.
You can understand that there is a huge compounded effect on profits, capital formation, investments, jobs creation, consumption and what not.
We can and should do better
But how do we go back to 3%? The most fundamental problem right now is recreating a pro-growth consensus. In other words, we need to recognize that we have a serious problem, and that it is entirely within our powers to fix it.
“No, America, 2% growth is not OK.”
Yes, we can go back to 3%. Yes, we have to look at what kind of public policies favor growth, and finally reach a political agreement about implementing the most suitable ones.
Getting used to mediocrity is psychologically dangerous, because it discourages new thinking and the generation of fresh ideas about what may help promote growth.
Mediocrity or worse the new normal in Europe
Do you want a cogent example of mediocrity or worse becoming the “new normal”? Well, look at Italy, the third largest economy within the Eurozone.
Today’s economic headline in Italy is that there is really good news about unemployment. Yes, unemployment in June was down, compared with May.
When bad is good
And how good are these numbers? Well, here we go. In June 2014 unemployment went down to (only?) 12.3%, while in May it was 12.6%. Youth unemployment is unfortunately a “lagging indicator”. Sadly it is still at 43.7%. (In the South of Italy it is actually about 60%).
But, overall, given this downward unemployment trend, Italy’s prospects have improved, right? And if you take into account that overall Eurozone unemployment has also declined, things look brighter for Europe as a whole. In fact, Eurozone unemployment has gone down to 11.5% in June, from 11.6% in May. Think about it.
So, cheer up! Unemployment in the Eurozone is on it way down, and in Italy it went down by a fantastic 0.3%, so that now it is only 12.3%.
Of course, nobody in Europe is really that happy contemplating economic stagnation and high unemployment. But since most Europeans in practice have accepted this dismal state of affairs as a permanent economic change, there is a sense of resignation. “This is how the economy is. Nothing that we can do about it”.
Bottom line: the Europeans have accepted slow but steady economic decline as an unstoppable historic trend.
America: focus on welfare programs, not on growth
Here in America, while our numbers compared with Europe’s are infinitely better, we have become accustomed to the new normal of chronic under performance.
Policy-makers are focused on beefing up social programs aimed at supporting those who have been left behind by a weaker economy, as opposed to ways to promote growth.
And this is a truly dangerous shift. The focus should be on devising more effective ways to help the economy. After all, by far the best social program we can come up with is a decent job for the millions who are seeking one.
We need to believe
However, more imaginative pro-growth policies can be hatched only by leaders who really believe that it is totally up to us to improve our economic eco-system, and that this is doable.
If we have given up, if we really believe that here in America 2% growth is ok and, that 6% unemployment is fine, then we are on our way to a Europe-like destiny.