from Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI
This year began with recession fears throwing a spotlight on the elephant in the room. As the cover of The Economist put it a few weeks back – central banks may be out of ammo to fight recession …
I presented “Flawed Assumptions and Grand Experiments,” at the Levy Economics Institute’s 25th Annual Hyman P. Minsky Conference this past week.
Key points are summarized below, and please follow this link to the presentation slides, which include notes.
Central banks may be out of ammo to fight recession.
In the summer of 2008, before Lehman blew up and many years before the secular stagnation debate, we showed that the pace of expansions had been stair-stepping down since the 1970s.
The weakening growth trends in labor productivity and the potential labor force are key to this structural decline in overall economic growth.
We’ve also shown why the case for a strong recovery beyond the first year following a deep recession is not supported by the evidence, as we had originally concluded back in 2009.
Therefore, the discourse among policymakers, trying to explain their disappointment with growth and prescribing additional solutions, has been based largely on flawed assumptions that trend growth was actually higher than it turned out to be, and that we were somehow owed a return to that long-term trend.
As a result, policy initiatives designed to blast the economy toward “escape velocity” wound up being not only misguided, but also futile.
For central banks in general, credibility is the most important asset, and even for the Fed, market-based and survey-based five-to-ten-year-ahead inflation expectations show little faith that it can reach its inflation target.
If you’re going to embark on Grand Experiments, you’d better make sure that your assumptions are rock-solid. But as we’ve shown, there should have been serious doubts in the first place about some key assumptions underlying central bank policy.
Ultimately, only policies that genuinely address the challenges of demographics and productivity have a chance to succeed.
