In economics you usually get “hung juries”.
Alan Krueger, former chairman of President Barack Obama’s Council of Economic Advisers and a professor at Princeton University, wrote an influential paper earlier this year arguing the long-term jobless face such unusual challenges in finding work that policy makers should count them out when trying to gauge potential unused capacity in the labor market – also known as slack—and its effect on inflation pressures.
“Overall, there is little evidence in the cross-state data that the long-term unemployed exert less pressure on wages,” the five New York Fed researchers counter, referring to people out of work for more than six months. “This finding, as well as the differences between the labor market outcomes of long-term unemployed workers and nonparticipants, suggests that the long-term unemployed should not be dismissed when considering labor market slack.”
New York Fed: “The results suggest that there is little difference in how long-term and short-term unemployment affect wages, and as a consequence, the long-term unemployed shouldn’t be dismissed when evaluating labor market slack,” the New York Fed authors say.
- From Board of Governors we “learn” that Recessions permanently lower RGDP:
The economic collapse in the wake of the global financial crises (GFC) and the weaker-than-expected recovery in many countries have led to questions about the impact of severe downturns on economic potential. Indeed, for several major economies, the level of output is nowhere near returning to pre-crisis trend (figure 1). Such developments have resulted in repeated downward revisions to estimates of potential output by private- and public-sector forecasters. In addition, this disappointment in post-recession growth has contributed to concerns that the U.S. economy, among others, is entering an era of secular stagnation. However, the historical experience of advanced economies around recessions indicates that the current experience is less unusual than one might think. First, output typically does not return to pre-crisis trend following recessions, especially deep ones. Second, in response, forecasters repeatedly revise down measures of trend.
But maybe that´s not what the evidence shows, at least for the US. In the chart below we observe that the 3.3% trend growth formed in the 1870-1928 period remained true going forward. Even after the “Great Depression” real output returned to the original trend level path! Under Bernanke´s watch RGDP dropped well below trend and shows no signs of returning to it (actually it is growing at a rate significantly below (2.2%) the trend rate (3.3%).
The next chart shows the more recent (from start of the “Great Moderation”) behavior of RGDP relative to the “centenary trend”.
The Bernanke´s Fed failure is starker in the more recent version of the chart.
The last chart indicates the “culprit” was the Fed by first allowing NGDP (because of oil price-inflation worries) to deviate persistently from trend and then tumble.
Policymakers seem to be making the best efforts, for the first time in at least one century and a half, to keep real output permanently below trend, and increasingly so!