When I discuss Lost Decades I always stress the fact that the “s” denotes the plural. Figure 1 shows that a decade and a half in, the trajectory of output has been noticeably depressed since 2001Q1.
Figure 1: Log GDP (dark blue), OECD forecasted (light blue), potential GDP (gray), and nearest neighbor fit against time, local weighting, bandwidth=0.3 (red). Source: BEA, 2011Q3 2nd release, OECD November 28 forecast, CBO Budget and Economic Outlook (August 2011), and author’s calculations.
Figure 2: Log per capita GDP (dark blue), potential GDP (gray), and nearest neighbor fit against time, local weighting, bandwidth=0.3 (red). Source: BEA, 2011Q3 2nd release, mid-month population from FRED, CBO Budget and Economic Outlook (August 2011), and author’s calculations.
In Lost Decades, we make clear that we can avoid two complete lost decades, if we implemented reasonable policies. But we also recognized the obstacles (p.221):
… Financial interests resist regulations that shift the burden of risky behavior back onto them and off of taxpayers. Beneficiaries of government programs fight against attempts to curb their benefits. Taxpayers refuse to pay the taxes needed to pay for the programs they want. Partisan politicians block reasoned discussion, suggesting absurd pseudo-solutions instead of realistic alternatives. …
And so we see today the blocking of a head for the Consumer Financial Protection Board [1], on top of attempts to repeal Dodd-Frank (no secret why); the wealthiest fighting hard to retain their tax expenditures [2], and others suggesting that cutting taxes and benefits can spur massive supply side responses never before witnessed [3]. (At least no one has argued that eliminating child labor laws would immediately boost potential GDP, so one should be thankful for small blessings.) At the same time, we see the dispiriting spectacle of the failure thus far to extend the payroll tax cut and unemployment benefits, despite the evidence that these are effective, job-creating measures (and the former was first advocated by Republicans).
Estimates from CBO suggest that both types of measures would have a substantial impact on employment (and hence output).
Figure from Elmendorf (2011).
Jeffry Frieden on New Hampshire Public Radio a couple days ago, here, and on Euronews auf Deutsch.
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One Response to “Lost Decades, Illustrated”
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