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(The author of this article is a libertarian, which makes his gloomy
prognosis on the capitalist economy all the more remarkable.)
NY Times, May 17 2015
Don’t Be So Sure the Economy Will Return to Normal
By TYLER COWEN
It is hard to avoid the feeling that our current economic problems are
more than just a cyclical downturn. We know that the economy has gone
through some bad times. But what exactly are we experiencing?
One relatively optimistic view is that observed deficiencies — like slow
growth in real wages and the overall economy, persistently low interest
rates and low levels of labor participation — are merely temporary. In
this view, these problems will dwindle after manageable problems like
high levels of public or household debt have been reduced.
Another commonly heard view is that we made the mistake of letting the
last recession linger too long, allowing some of its features to became
entrenched. That analysis suggests that if we correct past policy
errors, whatever they may have been, an underlying normality will re-emerge.
There are some nuggets of truth in both of these arguments, but there is
a much more disturbing possibility that could turn out to be more
accurate: namely, that the recession was a learning experience that we
haven’t fully absorbed. From this perspective, the radical and sudden
changes of the financial crisis were early indicators of deep fragility
and dysfunctionality.
Slowly but surely, we may be responding to these difficult revelations
by scaling back our ambitions for the economy — reinforcing negative
trends that were already underway. In this troubling view, we have
finally begun to discover some unpleasant truths. Borrowing a phrase
from the University of Toronto economist Richard Florida, it’s possible
that we are experiencing a “Great Reset.”
Let’s consider an analogy to see how this might work in practice.
Well before the recent recession, many colleges and universities
realized that they could not afford so many full-time tenured and
tenure-track faculty members, and they began to increase their reliance
on lower-paid adjuncts. Few institutions fired large numbers of
full-timers suddenly, because that could have left them understaffed if
trends reversed. Longstanding protections of tenure were also a
constraint. Instead, many administrators added modestly to the number of
adjunct faculty members, sometimes over decades, relying on retirement
and attrition to manage the shift in a relatively smooth manner.
That evolution reflects a more general principle: Institutional
rigidities don’t permit adjustments to occur all at once, but by
studying continuing changes we may be able to peer around a corner and
see where a sector is headed.
Such processes are scary because we may be watching the slow unfolding
of a hand that, in its fundamentals, has already been dealt.
There are signs that a comparable story may apply to the American
economy more broadly.
In manufacturing, for example, Ford, Chrysler, General Motors,
Caterpillar and Navistar (formerly International Harvester) all pay many
of their new workers much less. In some of these two-tier structures,
the new wage may be as little as half the old one. In addition to this
rapid change, the companies also seem to be reducing the ranks of highly
paid workers through slow attrition.
Here is another change that might be a broader sign of a pending reset:
A heavy burden of adjustment in the overall labor market is being borne
by the young. Wages for the typical graduate of a four-year college have
dropped more than 7 percent since 2000, and the labor force
participation rate of the young has been falling. One consequence is
that young people are living at home longer and receiving more aid from
their parents. They also seem to be less interested in buying their own
homes.
All of these factors could indicate that our economy is evolving into
one that will offer far less favorable long-run wage prospects. Much
research has shown that the effects of a recession can be pernicious for
decades: Earning a lower wage in earlier years is predictive of lower
wages through the rest of one’s career. While we are seeing economic
problems for the relatively young, they will eventually become dominant
earners in the economy and the major force behind broader statistics.
In short, are these economic problems transitory, or are we glimpsing
the beginnings of a grimmer future?
If a reset is underway, we might have to accept that public policy
cannot reverse it easily. Once unsustainable economic structures begin
to fail, it takes a significant improvement to make them viable again.
Yet because of the difficulty of making major changes under our current
political alignment, most new government policies today are no more than
changes at the margin. Perhaps the most basic problem is that it is
difficult to be sure when a reset is underway, and it is harder yet to
raise public alarm about changes that seem to be gradual and slow.
Most of all, it is not always wise to fight a reset.
Early in the previous decade, Germany realized its economic model wasn’t
working, and it accepted lower real wages for many workers.
Even though growth in living standards has been slow, the German economy
has been flexible and has appeared to be on a sustainable track. Maybe
that was the best Germany could do.
France, in contrast, has attempted to preserve high real wages and
benefits for prime-age workers, in part by buying older workers out of
employment and delaying starts for the young. But the country has a
higher rate of unemployment and, arguably, may face greater and more
sudden adjustments in years to come. French polls indicate high
pessimism about future economic prospects.
The debate over the economy these days isn’t just about income
inequality and what should or should not be done about it. Perhaps the
most crucial issue is whether economies will return to normal conditions
of steady growth, or whether we are witnessing a fundamental
transformation, unveiled in bits and pieces. Nominations for the nature
of that transformation include a “robot economy,” a new political
economy where elites have too much power or, perhaps, a new global
economy where the United States no longer holds such a dominant
position, to the detriment of American firms and workers.
No one knows whether or how much of a reset may be underway. Yet I can’t
help but wonder which features of current data might prove harbingers of
larger, more permanent changes to come.
Tyler Cowen is a professor of economics at George Mason University.
Follow him on Twitter at @tylercowen.
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