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Jonathan Tobin: Defending the Right to a Jewish State

Heather Hale: Compliment your kids without giving them big heads

Megan Shauri: 10 ways you are ruining your own happiness

Carolyn Bigda: 8 Best Dividend Stocks for 2015

Kiplinger's Personal Finance editors: 7 Things You Didn't Know About Paying Off Student Loans

Samantha Olson: The Crucial Mistake 55% Of Parents Are Making At Their Baby's Bedtime

Densie Well, Ph.D., R.D. Open your eyes to yellow vegetables

The Kosher Gourmet by Megan Gordon With its colorful cache of purples and oranges and reds, COLLARD GREEN SLAW is a marvelous mood booster --- not to mention just downright delish
April 18, 2014

Rabbi Yonason Goldson: Clarifying one of the greatest philosophical conundrums in theology

Caroline B. Glick: The disappearance of US will

Megan Wallgren: 10 things I've learned from my teenagers

Lizette Borreli: Green Tea Boosts Brain Power, May Help Treat Dementia

John Ericson: Trying hard to be 'positive' but never succeeding? Blame Your Brain

The Kosher Gourmet by Julie Rothman Almondy, flourless torta del re (Italian king's cake), has royal roots, is simple to make, . . . but devour it because it's simply delicious

April 14, 2014

Rabbi Dr Naftali Brawer: Passover frees us from the tyranny of time

Greg Crosby: Passing Over Religion

Eric Schulzke: First degree: How America really recovered from a murder epidemic

Georgia Lee: When love is not enough: Teaching your kids about the realities of adult relationships

Cameron Huddleston: Freebies for Your Lawn and Garden

Gordon Pape: How you can tell if your financial adviser is setting you up for potential ruin

Dana Dovey: Up to 500,000 people die each year from hepatitis C-related liver disease. New Treatment Has Over 90% Success Rate

Justin Caba: Eating Watermelon Can Help Control High Blood Pressure

The Kosher Gourmet by Joshua E. London and Lou Marmon Don't dare pass over these Pesach picks for Manischewitz!

April 11, 2014

Rabbi Hillel Goldberg: Silence is much more than golden

Caroline B. Glick: Forgetting freedom at Passover

Susan Swann: How to value a child for who he is, not just what he does

Cameron Huddleston: 7 Financial Tasks You Should Tackle Right Now

Sandra Block and Lisa Gerstner: How to Profit From Your Passion

Susan Scutti: A Simple Blood Test Might Soon Diagnose Cancer

Chris Weller: Have A Slow Metabolism? Let Science Speed It Up For You

The Kosher Gourmet by Diane Rossen Worthington Whitefish Terrine: A French take on gefilte fish

April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review March 18, 2010 / 3 Nissan 5770

The economy may need more aggressive and proactive treatment than it is getting

By Jonathan Rauch



http://www.JewishWorldReview.com | What if we had a recovery and no one noticed?

If only the question were whimsical. Gary Gorton, a finance professor at Yale University, recently returned from an economic conference sponsored by the London School of Economics and Political Science and the Bank of England. While there, he informally surveyed economists and financiers, asking them to lay odds on three scenarios. First, a recovery by mid-2011 or early 2012. Second, "Japanese-style stagnation." Third, a double-dip recession, like the one that aborted a nascent recovery in the mid-1930s.

The results, though unscientific, suggest cause for worry. For the British economy, the average view put odds of a recovery by 2012 at only 20 percent, with a 60 percent chance of Japanese-style stagnation and a 20 percent chance of a double-dip. Regarding the U.S. economy, the view was not as bleak but still bleak enough: a 60 percent chance of recovery but a 35 percent chance of stagnation and 5 percent of a double-dip. "I think this is still quite dangerous," says Gorton of a 40 percent probability of stagnation or worse.

His own view? "I am very concerned that we are headed for a Japanese-style lost decade. I think the main problem -- or at least one of the more important -- is that the banking system is in ruins. The traditional banking system relies on securitization for funding, and that is dead. Small banks continue to fail." The Federal Reserve Board, he says, "will keep rates low for a while, which will help. But we should be much more proactive."

Not all economists are as worried as Gorton -- far from it -- but recent conversations with a number of them suggest that policy makers are not taking the stagnation scenario seriously enough. More specifically, Washington has yet to get its mind around three important but rather unpleasant possibilities.

First, the economy may not reach a recognizably "normal" state for a long time. Even many of the moderate-case scenarios forecast a recovery so anemic as to be difficult to distinguish from a mild recession, at least for many Americans.

Second, the political system is unprepared for the downside scenarios. Just how unusual the current situation may be has yet to sink in among a political establishment that still counts on a steady recovery.

Third, if the economy does stagnate or stumble, the burden will fall almost entirely on the Fed to respond quickly and aggressively, which it says it will do. But, in truth, it may already be doing too little.

The economy grew 5.9 percent in the fourth quarter of 2009, but the number is not as strong as it looks. Most of it is based on temporary factors, notably a spurt of inventory replenishment and the now-waning fiscal stimulus. An overhang of debt and low property values continues to weigh down banks' and consumers' balance sheets. Greece's financial problems raise the possibility of a sovereign debt crisis in Europe, where growth has already slowed to a crawl and forecasts are dismal. Developing economies are a bright spot, but China, in the aftermath of a mighty stimulus program, is showing signs of a property bubble and is likely to throttle back.

Letter from JWR publisher


Hopes for a firm U.S. recovery depend heavily on consumers' getting back in the game quickly, an iffy proposition. In a recent speech, Dennis Lockhart, the president of the Federal Reserve Bank of Atlanta, sketched what he called "two competing narratives about how this recovery will play out." In one, businesses rebuild inventories, consumers regain confidence and spend, and banks dig out of their hole. In the other, debt-burdened consumers downshift to "a quite different mind-set compared to the precrisis, prerecession 'normal,' " and lenders are unable or unwilling to accommodate prerecession levels of consumer credit.

"In this narrative, growth continues but at a very modest pace, and unemployment is very slow to recede," Lockhart said. "The first narrative is a return to something resembling normal as we knew it; the second narrative describes a somewhat new and different world" -- Fedspeak for "Uh-oh."

The Fed is watching closely for signs of a stall and promises to act aggressively and quickly if it sees one. "Whichever way the economy tips, we are prepared," Lockhart told his audience. Rapid reaction might indeed prevent a second recession. But would it prevent something more like stagnation? That is less clear.

Even the midrange forecasts are not bright. The Congressional Budget Office, for example, expects unemployment to stay above 9 percent at least until 2012 -- an uncontroversial proposition, because it will take years to replace the 8 million-plus jobs lost in the recession. Moreover, CBO expects that the "output gap" won't be plugged until 2014, meaning that the economy will need that long to return to full steam. Even then, full steam may not be as fast as it used to be: For a variety of reasons, CBO forecasts the average potential growth rate in the latter half of this decade at only 2.4 percent, "well below the average growth rate of 3.4 percent during the past 60 years."

That, again, is a moderate forecast, not a downside one. It implies that Americans will be living with recession-like unemployment levels for at least two years, perhaps longer. Annual real growth in gross domestic product of about 3 percent -- the consensus Blue Chip forecast -- would be significantly slower than the 5 percent or so that is more typical of a recovery, says Joseph Gagnon, an economist with the Peterson Institute for International Economics. "Three percent growth is just not fast enough," he says. "You need more than that in order to get unemployment down and get the economy back to its potential."

Gagnon, who worked for years at the Federal Reserve, looks at forecasts showing growth, employment, and inflation all below target levels and draws what, in normal times, might seem an obvious conclusion: Monetary policy is too tight. But short-term interest rates are already at zero.

What the Fed should do, Gagnon argues, is redouble its balance sheet with a second large dose of so-called quantitative easing, a process in which the central bank creates money and pours it into the economy by buying securities. The Fed has already done about $1.7 trillion worth of quantitative easing, probably preventing a depression in the process, but Gagnon thinks that it should do $2 trillion more. "This is a new world," he says. "Once you hit the zero bound, little movements are no longer relevant."

The difficulty with his prescription is less economic than political. The Fed's aggressive actions to date have already caused consternation on Capitol Hill. Historians may look back and say that the Fed should have done more, says John Makin, the chief economist of Caxton Corp., a hedge fund. "But the real world is the real world. And if Washington believes we're on the path to recovery and the Fed gets more accommodative, that risks another bubble. The room is dark. They have to feel their way."

And so Gagnon and Gorton may be right. The economy may need more aggressive and proactive treatment than it is getting. But the political system has stretched as far as it can. The Fed cannot fire until it sees the whites of the enemy's eyes, in the form of a quarter or two of alarming economic numbers.

The problem is that we might never get a clear view of the enemy's eyeballs. The economic numbers might be disappointing rather than alarming -- but for years to come. Asked about a reactive Fed approach, Garett Jones, an economist at George Mason University, said, "I don't think that's good enough. I think we could go through the experience of a moderate slump for a very long time. There's no reason to think that any of this stuff is especially likely to trigger a collapse. But we could just limp along, Japan-style, for a good long time. It can easily take a decade."

Economically speaking, that outcome would not be catastrophic. Eventually the economy would recover. In the meantime, however, years of drag could do structural damage that would exact a permanent toll. Long-term joblessness erodes workers' skills and employability. Slow growth leaves the government in a deeper debt hole. Depressed balance sheets discourage adventurous investing, leaving entrepreneurial opportunities on the table. Even if it were economically sustainable, a recovery that looked to many Americans more like a recession could push anything like political normalcy well out of reach.

Only Peter Pan would make a confident prediction about the economy, especially in today's exceptional circumstances. But only Pollyanna would ignore unconventional ideas such as Gagnon's, which ought to be high on the policy agenda. The Federal Reserve, however, is politically out on a limb; Democrats have been distracted by health care and bailout backlash; Republicans, by demonizing fiscal stimulus, have made reality-based policy-making harder, which seems to be their job description nowadays. The economy may get less help than it needs.

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JWR contributor Jonathan Rauch is a senior writer and columnist for National Journal. Comment by clicking here.

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