Tuesday, June 28, 2016

Maybe ‘regime uncertainty’ slowing the recovery

This was my response to an article by columnist Catherine Rampell. It was printed in the San Antonio Express-News. Click here to read it. Or read it below.

Catherine Rampell says the assessment of our economy having the worst recovery after a deep recession since World War II is highly misleading ("Economic recovery better than you think," June 14). But her column itself may also be misleading.
 
She does acknowledge the slow growth rates in real GDP since the recession ended. Obama may be the first president not to have at least one year with a real GDP increase of at least 3%.
 
But in one sense, even though the GDP has grown (however slowly), the economy has not recovered. Right now, only 77.8% of 25-54 year olds have a job, still below the 79.7% in December of 2007, when the recession started.
 
If we give Rampell the benefit of the doubt, and agree that there has been some recovery, we can focus on why she says it has been so slow. It is because the recession was caused by a financial crisis and such recessions usually result in recoveries with less growth than other recessions.
 
She gets that from a paper by two respected economists, Carmen M. Reinhart and Kenneth S. Rogoff. They "examined the aftermath of 100 financial crises spanning the past century-and-a-half."
 
But other economists have looked at this issue and are at least somewhat skeptical that recoveries after financially caused recessions are different from others. Christina and David Romer wrote a paper on this in 2015.
 
They said, of financially caused recessions, "we find that output declines following financial crises in modern advanced countries are highly variable, on average only moderate, and often temporary."
 
Christina Romer was Obama’s first chief economic advisor and is now back teaching at the University of California (Berkeley). She is also an acknowledged expert on the Great Depression. David, her husband, is a recognized expert on economic growth.
 
Ms. Rampell has probably heard of them yet she failed to mention their research on this subject. And the Romers are not the only skeptics of this thesis.
 
Michael Bordo (of Rutgers University) and Joseph Haubrich (of the Federal Reserve) wrote a paper last year on the topic and concluded that "recessions associated with  financial crises are generally followed by rapid  recoveries." Again, this is not mentioned by Rampell.
 
If it was not the financial crisis, then what might make our current recovery so weak? It could be a result of economic historian Robert Higgs' concept of "regime uncertainty," the idea that with so many new regulations being enacted, businesses may be afraid to invest, not knowing what initiatives they will be allowed to continue with in the future or what their profit rate might be.
 
Back in 2011, Scott Baker and Nicholas Bloom at Stanford University and Steven Davis at the University of Chicago analyzed "regime uncertainty" and found it to be a valid thesis. They created an index to quantify uncertainty and concluded "When businesses are uncertain about taxes, health-care costs and regulatory initiatives, they adopt a cautious stance."
 
If business becomes cautious, that means less investment spending. Which, in turn, can reduce the growth of GDP.
 
None of this conclusively proves that Rampell is wrong. Showing cause and effect in economics is difficult since there are so many uncontrolled variables and each recession can have its own peculiarities.
 
But I think that Rampell was wrong to base her opinion only on the research of two economists (Reinhart & Rogoff), even though they are well respected. We need to be open to other valid causes of the slow recovery.

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