Fienup: At last, an end to the ‘New Normal’
By Matthew Fienup
There is one clear lesson from the first 30 days of the Trump economy. The so-called “New Normal,” a belief in the inevitability of poor economic performance following the Great Recession, is now dead.
I wish I could also say that a return to robust economic growth is just around the corner but the early signs from the Trump administration do not look good. Poor economic performance is likely to continue. What is dead is the idea that poor economic performance is normal or inevitable.
From 1947 until 2007, the U.S. economy grew an average of 3.5 percent per year. At that rate, the size of the economy doubles with each new generation.
Since 2009, growth has averaged only 1.8 percent. The past two years have been particularly worrisome. In six of the last seven quarters, investment growth has been negative or near zero. Productivity declined in three of the last five quarters. And workforce participation is near its lowest rate since the ‘70s.
To hear many economists, journalists and policymakers tell it, this is the “New Normal” for the U.S. economy. It’s the best that we can hope for given fundamental changes underlying our economic situation. According to economist Bob Gordon of Northwestern University, this poor economic performance is not just a temporary, post-recession phenomenon but rather a permanent trend resulting from missing innovation.
At California Lutheran University’s Center for Economic Research and Forecasting (CERF), we reject these hypotheses.
The underperformance of the U.S. economy over the past eight years is not like a change in the weather. We are not at the mercy of overwhelming outside forces. This is not the predictable result of a serious financial crisis.
The current regime of slow economic growth is largely the result of policy. From a Central Bank that has undertaken discretionary policies never before contemplated and poorly understood, to serial trillion-dollar federal budgets deficits, to regulation by pen and phone, we see no possible way for the economy to perform at or even near its potential given the restrictions and the uncertainty that policy has created.
Fortunately, the lie of the New Normal is being revealed. With the election shocker of Nov. 8 and the dawn of a new administration in Washington, economic forecasts have been revised upward. Some of the biggest and most respected forecasting houses are speaking of potentially “big upsides” to the new administration. Even Trump detractors are admitting that they will not be surprised if economic growth accelerates in the years ahead.
And then there are markets. As of this writing, the Dow, Nasdaq and S&P indexes each stand at an all-time high. The S&P is up nearly 10 percent since election day, an increase of $2 trillion in total market cap.
Each of these revisions to the country’s economic outlook is an admission that policy matters. Each new stock market milestone is evidence that the economy’s poor performance is not inevitable. Expectations have changed because of a belief that the new administration will change policies that are primary drivers of poor economic performance.
If only we could see major corporate tax and regulatory reform.
Ever contrarian, the CERF team disagrees with other forecasters and with market participants about the probability of significant reform. We believe policy matters, but so do politics. In the current political environment and given early signs from the new administration, we assign low probability to the possibility that the Trump administration can achieve significant reform.
We see poor economic performance for the foreseeable future, it’s just not normal. Poor economic performance is the result of choices that were made and continue to be made by policymakers.
One forecast that we would love to get wrong is the probability of true reform. If meaningful tax and regulatory reform actually happen, then our economic forecasts will be wrong and others will be right. In that case, we will be wrong about the politics — not about the economics. If true reform does happen, Americans are likely to enjoy economic opportunity not seen in the past decade. This would be a welcome return to the Old Normal.
• Matthew Fienup is the executive director of the California Lutheran University Center for Economic Research and Forecasting.