In Search of ‘Natural’ Velocity: Why isn’t America growing faster?
I HAD high hopes for the American economy after the Federal Reserve’s policy shake-up in September. It looked to me like a shift in framework that signalled increased tolerance for inflation, one that could potentially allow for a shift up in the trajectory of the recovery. Revisions may vindicate this view, but Friday’s jobs numbers, for the month of November, show an expansion stuck on course. The economy added 146,000 jobs last month. The Bureau of Labour Statistics helpfully noted, “Since the beginning of this year, employment growth has averaged 151,000 per month, about the same as the average monthly job gain of 153,000 in 2011.” Since late 2010, growth in employment and nominal output has been strikingly, impressively, and disappointingly stable.
Will the economy ever manage to do any better? Goldman Sachs economist Jan Hatzius reckons there’s a chance it will turn a corner late next year, provided that Congress doesn’t drive the country back into recession. In an interview with Business Insider’s Joe Weisenthal, he describes his sectoral balances approach to business cycles:
[E]very dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically. Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector’s financial balances…If the business sector is basically trying to reduce its financial surplus at a more rapid pace than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger, higher, more income, and ultimately feeds back into spending.