Eduardo Porter on the Need For Fiscal Stimulus

I agree with this call:

At the very least, the dismal forecast calls for the government to prepare for another bout of fiscal stimulus. The recovery by now is already seven years old. With interest rates near rock bottom, the Fed would have little room to prevent another spike in unemployment if the economy were to falter.

I agree with this because I believe we are still far from full employment. But alas, I’m not sure what Porter is really trying to say here? A lot of what he writes suggests we are near full employment with potential output growth being rather limited:

But that cyclical tailwind — bolstered by putting idle resources back to work, which brought the unemployment rate down to 5 percent from 10 percent — is spent. The jobless rate will not fall from 5 percent — close to what economists consider full employment without excessive inflation — to zero. What remains is an economy at the mercy of two powerful dynamics. The first is a gradual shrinking of the work force as a share of the population, as it is squeezed by successive waves of retiring baby boomers and no longer gaining from the one-time surge of women into the paid work force in the 20th century. The second is a persistent decline in productivity growth over the last dozen years. Lakshman Achuthan of the Economic Cycle Research Institute adds it up this way: Over the next five years, labor force growth of half a percentage point plus productivity growth of half a percentage point will push the economy ahead at the anemic pace of just 1 percent a year. even the Congressional Budget Office’s modest projection that the economy will grow by 2 percent a year over the next 10 years is excessively optimistic, he argues, relying on a tripling of the rate of productivity growth from its average of the last five years.

OK – if he is this pessimistic, then why open with this?

Back when “Gunsmoke” was on TV and Lyndon Johnson was president, the United States economy managed to storm ahead by nearly 5 percent a year for nearly a decade. What we would give to recover some of that power!During Ronald Reagan’s presidency two decades later, the rise in the economic cycle, coming out of what was then the worst downturn in the post-World War II era, averaged a bit over 4 percent a year.

A little fact checking please. From 1964 to 1966, real GDP growth did average 6.3% per year as we lowered the unemployment rate from around 5.7% to 3.6%. This, however, is not 5% growth for a decade. And even the most Keynesian economists back in 1966 were saying the fiscal stimulus from the triple whammy of the 1964 tax cut, the Vietnam War build-up, and the Great Society programs may have gone too far. From 1983 to 1985, real GDP growth did average 5.3% per year but that was our economy coming out of a massive recession engineered by a vicious use of monetary contraction to kill inflation. Hey as we are bringing up unusual periods, let’s go back to the Korean War which created 8.4% per year growth for two years. Of course, the unemployment rate started at 6.6% and fell to 2.5%. After this military Keynesianism, we saw a decade with three recessions. I know that I may be beating a very tired horse here but one cannot talk about growth rates over a decade without specifying what the current output gap is and detailing a model of our potential output will grow over time. Porter’s pessimism on this score seems to be out of line with his hope for the benefits from his proposed fiscal stimulus.