Is slow growth the new normal?


(classical music) – The world’s industrialized economies appear to be in recovery mode. After 2% growth last year
some expect the U.S. economy to expand by as much as 3% this year. The Japanese economy seems
finally to be reviving, while in Europe former basket
cases Ireland and Portugal have returned to the debt markets. Even Greece is saying it could issue sovereign bonds this year. But there are several large clouds accompanying this silver lining. There’s concerns about deflation, persistent and rising
inequality, falling productivity and low labor force participation rates. The recovery since the financial crisis has been decidedly weak. Some observers say that
what recovery there has been is largely due to the fuel
of central bank support, others that we are in an
era of secular stagnation in which savers outweigh investors. So can the U.S. and other
industrialized economies return to their pre-crisis growth rates or are we witnessing a new normal of slower economic expansion? Welcome to the Big Question,
the monthly video series from Capital Ideas at Chicago Booth. I’m Hal Weitzman and with
me to discuss the issue is an expert panel. Erik Hurst is the V. Duane
Rath professor of economics and the John E. Jeuck faculty
fellow at Chicago Booth. An expert on housing
markets, labor markets and household financial behavior, he’s also served as an advisor to the Federal Reserve Bank of Chicago. He’s the recipient of several awards, including most recently, the Ewing Marion Kauffman Prize Medal for distinguished research
in entrepreneurship. Anil Kashyap is the Edward
Eagle Brown professor of economics and finance at Chicago Booth and a faculty director of the
initiative on global markets. He’s also an advisor to the
Federal Reserve, the IMF, the Congressional Budget Office and the Swedish Central Bank. And Harald Uhlig is a
professor of economics and former chair of the
economics department at the University of Chicago. He’s an expert on, among other things, the intersection of macroeconomics
and financial economics. As well as his work at
the University of Chicago, he’s also a guest
researcher at the Bundesbank and head editor of the
Journal of Political Economy. Panel, welcome to the Big Question. Erik Hurst, let me start with you. When we say secular stagnation, what does that actually mean? – Usually talk about it as a mean is a overall lack of
demand in the economy. Used to be about 20, 30 years ago, talking about the decline
in population in the U.S. and when there’s less people, there’d be less demand for products and firms wouldn’t have
to produce as much. I think people are
talking about it now more in the sense that we used to talk about an old liquidity trap that real interest rates in the economy need to be lower than they are now. And the Fed Reserve is bound
by interest rates at zero so interest rates are
higher than they should be and as a result we can’t get enough jump starting in the economy. – Okay and Anil Kashyap,
how serious a concern is secular stagnation? – Well for the U.S. I don’t
think it’s looking terribly good because it looks like we’re
finally gonna start growing. If you looked at the normal
patterns in a recovery, you’d say well we’re four
years into this recovery. It’s about time for another recession and lately the growth has
actual looked pretty good. Probably looks better this coming year than it has in any of
the last three or four so I’m guessing a year from now we won’t be talking
about secular stagnation in the United States. – And Harald Uhlig, if we shouldn’t worry about secular stagnation in the U.S., at least not this year, what about in Europe? – Well Europe is not out of trouble yet. The situation in Europe looks better, but unemployment still
extremely high in Spain. We’re talking about 25% youth
unemployment is about 50%. Greece is certainly not out of trouble so the eurozone still looks very fragile and it’s an interesting
question of how to go forward when there’s a good scenario
and there’s a bad scenario and I think the… We need to be talking about both. – Okay, well, sketch them
out very briefly for us then. – Well the good scenario is
that things work themselves out, that somehow labor market
reform start to kick in. In Spain, Greece, that maybe
global demand picks up. Unemployment comes down, maybe the banks become healthy again. The single resolution mechanism is finally bringing peace and quiet
to the financial system. Everything maybe in three, four years quiets by largely forgotten. It’s entirely possible. It’s also possible that the
eurozone quiet flares up again, that investors in these government bonds think once again that
maybe fiscal plans in Spain are not sustainable, that maybe there’s
gonna be more talk again about exiting the eurozone
or break up the eurozone. It could happen that the
German Constitutional Courts steps in and says certain
policies by the ECB, particularly the OMT are unconstitutional and that the ECB has to retract. And who knows? We might be back in the storm. Maybe what we are seeing is just the eye of the storm passing us by and it looks nice and quiet, but maybe the second hurricane is coming. – So those expectations that
this was gonna be the year that eurozone got back on track, you are not convinced yet? – Not convinced. Somewhat cautiously optimistic, yes, but you look at the
statistics in these countries. They’re not in good shape by
any stretch of the imagination. – Okay. Well you mentioned employment. I wanna come back to the U.S. Erik Hurst, you’re an expert
on U.S. employment trends, what are we seeing here? What are the kind of the
secular trends here in the U.S.? – I think I’m most worried
about going forward is the very low employment
to population ratio we’ve seen in the U.S. We had this big decline in
the fraction of people working and it has not rebounded at all since the recession has finished so even though we’re
growing at 2% to 3% per year coming out of the recession, we’ve not seen large employment gains measured by the employment
to population ratio. And it’s kinda very… The inequality you see across people with skill and without skill shows up strongly in
the employment numbers so for workers with less
than a college degree, they have seen very little
gains in employment. The employment to population ratio fell and hasn’t rebound much, but for those with a
college degree or more, we’re kinda right back
on trend where we were prior to the recession. So you see this kind of
divergence going forward and I don’t see anything on the horizon that’s gonna tell me that’s gonna change if it hasn’t started changing already. – So you see the kind of
low participation rates in the labor forces being something that’s gonna be with us for a long time? – I think part of it is gonna
be with us for a long time. – Does that mean people
who lost their jobs during the downturn may never work again? – Older ones, those might not work again. We’re seeing big uptakes
in the disability roles and I think the younger workers adjust. Young generations tend
to be much more elastic than older generations, but these older workers
who kinda got displaced during the recession, I think there might be periods of time where they might remain
out of the labor force for a persistent period of time. – And what effect is that gonna have on U.S. growth in the longer term? – Again it’s related to
the inequality questions that you hear people popping up and talking about going forward that there’s gonna be a group of people where the economy’s
gonna be chugging along, 2%, 3% going forward. Some are gonna get more of the gains and others are gonna
get less of the gains. – So to you it’s less a question about the actual number of growth and more about how it distributes. And it causes a kind of
a global concern, right? Anil Kashyap, is that really
affecting the global economy? – Well maybe, but I think… Erik didn’t say anything
that I disagree with, but the usual debate over inequality is smearing together
very different things. There’s some people that are ranting you got the top 1% and that’s
got to do with globalization and there’s lots of reasons why the most talented people in all industries are making more money now
than they ever have before. That’s completely separate
from all the problems that happen if you’re
unmarried and have a kid without graduating from high school. I think those are really
rather different problems, but those are the two extremes. And then the middle, you’ve
got somewhat different dynamics going on as well and so this question about how the overall strength of the economy plays into these three different groups, I think is very different. – But there is a question isn’t there about the middle class, particularly in industrialized countries and the kind of stagnation and
incomes in the middle class? – Yeah, although there
were some very recent work that was released just last week by Ross Chidi and Emmanuel Saez that got the most comprehensive
look anybody’s had at actual mobility, including
for the middle class and those numbers kinda suggested that if you were just looking
at the broadest trends, at least between the people coming into the workforce in the early 1970s and then all the way until the late 1980s, outcomes look pretty similar. Now maybe you aren’t
happy with the overall amount of mobility, but the narrative that it’s impossible to get into the middle class or to get from the middle
class into the upper classes just doesn’t look like it’s in the data. – Related to that, there’s
a lot of work showing about a hollowing out of the
skill distribution in the U.S. that jobs that we used to do, we just don’t do as much anymore. Some people call them routine jobs, you could say manufacturing jobs is the big piece of these routine jobs and those jobs are just less
prevalent than they were before and people would associate
some of these jobs as being part of middle class jobs and you’ve seen that missing
part of the skill distribution. So you have people, bartenders
are doing relatively well, you have college professors
doing relatively well, but there’s kind of in the middle there seems to be a
missing mass of workers and I think that’s the kind of thing that I’ve been thinking about. In my own work related, David Autor at MIT has some stuff kinda showing about this decline in routine jobs in the U.S., whatever you call it,
manufacturing, routine, and how that’s had effects on certain skill groups more than others and I think that’s… I don’t see any way to get
around some of those issues. – Harald Uhlig? – I believe that inequality’s actually an important
ingredient for strong growth. You see if there are jobs
out there that pay millions, tens of millions of money, that ignites dreams in people. That ignites dreams in young people and that’s what we want. We want young people to dream. You want them to dream that
they can change the world, that they can make it big. That they go after in
creating a new company, maybe creating new movies,
creating new songs, creating that new pro that the Wall Street sells to the world and it’s these dreams that power people in becoming a creative entrepreneur and going out there and trying
stuff even if they fail. People routinely overestimate
how successful they can be. Everybody plays on his piano and thinks he’s gonna
be the next pop star, but lots of people are
trying, a few make it big time and that’s what drives with industry. If you look at China, lots and lots of people are dreaming. China has permitted more
of a market economy now. There’s quite a middle class in China and they want their children to be the world movers of the future. They send them to the best
universities and so forth. They want them to be successful so China has discovered inequality and I think we should cherish
inequality in America. – Really, so you think inequality is actually a powerful force for growth? – Absolutely, yes. – Erik Hurst? – You always wanna have people
have the right incentives to kinda innovate or invest in some sort of productive capacity. The thing that people kind of fixate a little bit more now when
they’re talking about inequality at least the way I’ve been
thinking about inequality is whether people have the skills to do some of those tasks
that has the high rewards. So is there a matching
between the skill composition of the workforce and the
skills which are needed to get some of those high returns. So you want both. You wanna have high returns
to encourage innovation, but you also want the
composition of the workforce to be able to have the skills to innovate and I think that’s kind
of where we’re seeing some of the mismatched today. The top of the distribution
or when I say top, it doesn’t mean 1% or so. We’re doing quite well. People are innovating and
coming up with products, but you’re seeing a tremendous
amount of sluggishness, at least in employment for people with high school degrees or less. Or even a little bit of some college, but not a college degree. – Anil Kashyap, let me ask
you about monetary policy. How important are central
banks to the growth to kind of, fledgling
growth that we’ve seen last year and this year so far? – Well I think they’re reaching
limits of what they can do. We’re five years past the recession. Most theories would say at some point the monetary effects start to die out and that the supply side of the economy becomes more important. The longer the horizon, by the time you’re talking 10, 15 years, nobody thinks monetary
policy can stimulate an economy for that long
so we’re halfway there. And I think we’re seeing
some of these economies are kinda slumping back
into the same bad situation that they had a year or
two before the crisis. If you look at one indicator is the IMF’s assessment of what countries needed to do to grow and one thing that’s very disheartening is if you took what the IMF was saying to Italy, France, Spain in 2003 and look at what they’re telling
them in 2013 it’s the same. Cut and paste. And so that’s pretty discouraging
because the challenges are much harder now to
implement the reforms that they wouldn’t do
when the sun was shining. – What do you make of Japan? Is your next bit on Japan? It seems there that loose monetary policy is having some effect in helping… – Yeah, but it’s mostly
just affecting inflation. They’re about to raise taxes in Japan. We’ll see how the economy does after that, but the famous third arrow
isn’t even out of the quiver. It looks like the third arrow’s a bluff. – You’re talking about structural reform? – Yeah, so Mr. Abbey said we need massive fiscal stimulus, we need loose monetary policy and then we need structural reform so he’s done the fiscal stimulus, he’s done a little bit of… And he’s done the monetary policy now, but the big rewards will come
from reforming the economy and kind of shaking
them out of the Malays. Making it easier to create businesses, creating easier times to hire workers and for people to get training and so on and that’s just stagnated, nothing. – Harald Uhlig, is that a
similar problem in Europe? Is it the failure to actually
put in place the reforms that’s the achilles heel? – I think Spain and Greece and Italy, there it’s so good for so many years that there was little necessity to do much and housing market boomed and
people were buying properties. Look at Barcelona now and compare to how it looks 10 years ago, what a change, what a city. And so very big party
and I don’t blame them. Things were good and the
party has come to an end and now they have to get out of this and if you look at competitive numbers for Italy for example, they looked… Looks like Italian wages are 20% too high so something has to happen
on the labor market there, but it seems to me they are still, they’re having great difficulties even making a start on this and there’s a big
disagreement among the parties and they still think they can
shift the problem elsewhere. So I think they will probably
carry these problems forward for quite some time. – Erik Hurst? – Yeah so one of the
things we usually think of that Harald referred to earlier is having a flexible enough economy so people with the innovations, their skills as a pop star
or their skills as a banker could translate that easily. And you want it both on the
worker side and the firm side and I think one way that the
U.S. is in a better shape than Europe on this is
that the labor market is pretty flexible. There’s not a lot of cost to hiring, there’s not a lot of cost to firing and that makes us a
little bit more flexible relative to Europe. The thing we can be concerned about is making sure we don’t
go down a path in the U.S. where you have some of this inequality and you wanna treat the inequality to the extent that it’s there in a way that doesn’t discourage
people’s ability to work. – Harald Uhlig? – And I think that’s an excellent, really important point and it’s… When you can think about Europe again, why Germany for example always looked to the U.S. labor market and said how can we bring unemployment down. Unemployment was
persistently high in Germany. Germany was considered
the sick man of Europe and so they looked to the U.S. experience and looked to the damaged experiments and reformed the labor market. The shrewder government
reformed the labor market. It was a big reform, it
was a very painful reform. The social democrats lost
the elections over that. They broke up as a party. Politically it was enormously costly, but Germany’s now bearing
the fruits of that reform. Germany’s doing well I
would say within Europe and some of these other countries because there was much less of a need and it didn’t introduce a flexibility so hopefully many of these other countries learn and have to go through
painful labor market reforms. I think there’s no way around it and getting more of that
flexibility that the U.S. has. – Anil Kashyap? – Yeah, while I totally agree
that the shredder reforms were vastly underestimated at the time as to how well they set
the stage for German growth over the last six, seven years. And Germany sticks out. It’s growing, it’s recovered to where
it was before the crisis. There’s a lot of momentum
there, optimism and all that. And I think when Mrs. Merkle talks about what she means by austerity, she means doing the hard things. Having the hard conversations, making people be accountable and so on in a way that the Germans actually did. Now the side to that was the Germans had a lot of fiscal stimulus
at the time they were doing it so they blew through the
budget deficit thresholds that they were supposed to avoid. And I think that was a good trade and I would hope that
the Germans at this point would say to Italy and Spain if you actually do reform, we’ll let you off the hook on what your budget
deficits might look like during the short period while
you’re enacting reforms. – What are some of the
policies that might work in terms of global growth? Structural reforms is one. What are some of the other things that governments could do that might help some of these problems that you’ve raised? – Well the structural
reforms is kind of like the catch-all for everything, but things that make it
easier to form businesses, things that make it
easier to grow a business. In a lot of these countries
they have size based regulation where you get to 20 workers or 50 workers, you’re subject to a whole host of rules so guess what, no one wants to grow. But we know small firms are massively less
efficient than larger firms. And so collecting taxes
on a more reasonable way so that you can’t evade
taxes by staying small and have more equitable tax rates because you collect from everybody. – Okay, and Eric Hurst, you talk about the labor market in the U.S.
and inequality in the U.S. What would you like to see
done to address those concerns? – The big issue I think with
the U.S. is the labor market is very flexible and most of these isn’t. The thing is there’s a skill mismatch for where the jobs we’ve been moving to and some of the skills the
workers have to fill those jobs and how you promote human
capital among a population, particularly when there’s
already a return to skill, that’s pretty big. You could get a lot of
return from going to college or trying to be a pop star and if people aren’t responding to those, how do you do it? That’s above my pay grade, but I know many of my colleagues, our colleague Jim Heckman over
in the economics department, thinks hard about how
you promote human capital even within the U.S. and not a lot of levers have
big payoffs at this time that people have stumbled across. – It’s partly also because
it’s a big social problem. If you look at the bottom end
of the labor distribution, the labor market outcomes
and income distribution, they have four or five pathologies
that are all gone wrong. You don’t have two parents in homes, you have people that are undereducated, you have people that don’t
have consistent work histories. They probably don’t
have good medical care. Maybe that’s gonna get finally fixed. They’re like one shock away
from having their lives unravel and it’s not gonna be something
simple to turn that around. – One program that I do
think we need to revisit at some point is the disability program. There’s been a lot of evidence
over the last 15 years or so that it is a margin of substitution when
labor markets get weak and the thing about the disability program relative to other labor
market subsidiary programs, we have the unemployment, it tends to be permanent. Very few people ever exit
from disability back into work and to the extent that people are using it as a marginal insurance for
business cycle variation, I think we might need to think about ways to strengthen that. – My good colleague Casey Mulligan over in the economics department, claims that all the various programs and added taxes and then
extending unemployment benefits and so forth and so forth, it maybe contributed half of what we see in terms of the unemployment numbers. It has doubled the severity of the crisis. No one maybe can clear the numbers and there’s been a big
debate about this, but… – Are there just too many
incentives not to work? – Exactly. I think we ought to take
a harder look at these and not just say we
gotta help these people so let’s do one program after the other. Oh, another crises even deeper. Now let’s do another program. But rather maybe we change
and really think hard whether these programs are
really helping the people where they need it. These are as Erik described. These are people that
have fallen on hard times, but it’s not the government that’s gonna create jobs for them. It’s the private market
that creates jobs for them so we have to make sure that
the private market does that and does that soon. – Casey’s numbers might
be on the high side, but the direction goes the right way in the sense that when you
create incentives to work, people work. When you create incentives not to work, people don’t work. So we know the direction and
I think some of these programs are more salient than others, but we wanna promote
an environment of work and to the extent that we think as a society that some
distribution needs to be done to help mitigate it, we wanna do it in a way
that doesn’t discourage reentry into labor force
or reaccumulation of skills to match that the jobs that are out there. – Okay. Going back to the global
economy, Anil Kashyap, the IMF and others have fretted publicly about the threat of deflation. How serious is that a concern? – Well depends where. I don’t think we’re headed
towards deflation in the U.S. Very low inflation I
think is gonna be present in many of these countries. I don’t think anyone expects
Japan to have inflation above 2% for the next few years, even though they’re trying very hard now. If you ask me what’s the
risk over eight or 10 years, it’s that they don’t do the reforms and they wake up one day
and they can’t borrow and the only thing you
can do is print money. So I still think a good old
fashioned currency crisis is a possibility if they
don’t start doing things to facilitate growth. So I’m not so worried
about deflation right now, but I am worried that
if there isn’t growth, something’s gonna have to give. – Okay, and deflation in Europe? – Well we’re still having inflation more than deflation in Europe, even though it’s very, very modest. I think it’s lower than what the European Central
Bank wants it to be. I think what we’re looking at is an entirely new phenomenon like when inflation
really used to be an evil and central banks had a hard
time getting that into check. And then over the last 20 years or so, central banks actually
managed to control inflation to remarkable degree and get it down to the 1% to 2% range. Really precisely controlling
it which is remarkable and there were a lot of voices from the economic community that said let’s bring inflation down. Maybe some slight deflation
is even a good thing. You can make that argument. So now they have it so low occasionally we’re gonna
hit those constraints. Occasionally we’re gonna see
zero number interest rates and occasionally you’re
gonna see some deflation. The question is, is it bad? And they are much more skeptical than various other people. So just as one example, I’m doing research with Chiara Fatid who was a graduate student here. Already probably taken medium scale and… He wanted to know how much the fact that the central bank
hits that zero low bound, how much that is contribute to the crisis. Then we found it’s a very small fraction. It’s true it would’ve been nice if they could’ve gone somewhat lower, but that’s not explaining why we are in such a deep recession. – The thing that Anil mentioned I think kind of slipped in
there that it’s important is that a lot of the inflationary periods we’ve seen in recent
times when central banks have gotten good at managing inflation have come from big fiscal
burdens on the economy, a promise to pay a certain group and not a lot of tax revenue’s come in so there’s the temptation
to run the printing presses. And I think when you’re talking
about the structural reforms and potential inflation going forward, the structural reforms of trying to manage with a aging population
and low fertility rates could put this kind of
pressure on modern economies and that I think is the risk
of inflation going forward is these kind of fiscal
imbalances within the government. – Anil Kashyap, the U.S. used
to carry the global economy. U.S. consumer was kind of the
engine of the global economy. This year it may be that
the U.S.’s emerging markets have slowed down considerably, it may be that the U.S.
is the only economy to start growing again in earnest. Can it carry the global
economy the way it used to? – I don’t know. I’m not sure that anybody
in the U.S. should care. We should run good policy
for what’s happening here, paying a little bit of
attention to the world, but largely we should try to
get our own house in order. We’ve got these aging problems
that Erik talked about that are eventually gonna
have to be attended to. It would be nice to get
something in place on that front, but I think this year does look
relatively good for the U.S. and assuming there
isn’t a crisis in Europe or some huge crisis out of the Middle East or somewhere else, I think the outlook here is pretty good. So I see more risk to the
upside of growth in the U.S. than the downside. That’s the first time I
think you could say that since before the crisis. – Is the eurozone still kind
of the potential danger here for the global economy? – I guess that’s one of them. Certainly the Middle East I still think is one crazy dictator
away from creating chaos so I think you can’t
take that off the table. And then if there was a real big collapse in emerging markets, it would be bad for the U.S., but I think Europe is the biggest risk largely because there doesn’t
seem to be a plan B in Europe. If you look back in Europe
for the last three years, it’s always oh, then the
German election will come. Now it’s the ASIC quality
review of the banking system. After that happens and nothing changes, they’ll invent some other
thing to look forward to and the answer’s staring
them right in the face. They’ve gotta do the stuff that the IMF’s been telling
them to do for 10 years and that Harald’s been writing about. Everybody looks at Europe and says you guys have huge government sectors, you have very weak incentives
to hire people, to grow. You gotta fix that. Germany did, it grows, but we explained that away some other way. We just wanna look and some of the countries
are going backwards. France has been going backwards
for the last two years so we’re not even talking
fighting to a draw. It’s actually getting worse. – Is there a danger that if you get growth,
even modest growth, actually it has a downside
which is you never bother attending to these reforms either in the U.S. or in the eurozone? – There’s always an
incentive to push hard things off to the future when maybe… The way I like to say, structural reforms might not be needed if you get big positive productivity draws for many, many periods in a row. So people hope that it’s
easier to kick the can down and there’s some part of distribution which says maybe if you kinda kick it down and you get lucky, then you don’t need to do the
other big structural reforms, but in practice you always do. And those periods of high,
successive of growth don’t come and so it’s easier to
adjust with these things earlier rather than later. You get smaller chains
early, bigger chains later so the more you kick
the can down the road, the more disruptive
adjustments need to take place. – And actually productivity’s an issue we haven’t talked about, but that’s been… It was dramatic fall in productivity for the first time last year
according to a recent report. Harald Uhlig, should we
expect any kind of significant move forward from the eurozone this year? – In productivity. – Well any of these reforms
we’ve been talking about. You think it’s so necessary? – I think the countries
gradually come to grips with the situation. In Spain I think I’m a bit more
hopeful than Italy frankly, but who knows. As Anil pointed out, in France things have been
going backwards for awhile and we’re… Trying to implement tax rates of 70% as some of our colleagues
elsewhere urge them to do actually and now he’s retreating from this so I think even in France
it slowly dawns on them that there may be
business unfriendly policy is not the way to go. But whether we see much of a contribution toward economic growth from Europe, I think that will be a stretch. – Okay, well on that note
I’m gonna wind things up. My thanks to our panel, Erik Hurst, Anil Kashyap and Harald Uhlig. For more research,
analysis and commentary, visit us online at
chicagobooth.edu/capideas and join us again next time
for another Big Question. Goodbye. (classical music)

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