Noam Scheiber has an interesting article in The New Republic laying out in some detail why even though the recession may be over real recovery is likely to take a long time. The basic issue is debt overhand. During a bubble, most people and firms began acting as if they owned lots of very valuable assets against which they could borrow money. Then the bubble pops, and it turns out that everything everyone owns isn’t worth as much as they thought. But their debts still are! That means that spending relative to income needs to become a lot lower than it was during the boom, and stay a lot lower for quite some time until things can balance out again:
Absent a strong demand for exports, the most plausible way for a country to crawl out of this kind of recession is for households to keep paying off debt until they can afford to spend again. Indeed, as Paul Krugman argued in a recent lecture series at the London School of Economics, the reason the United States didn’t slip back into depression after World War II–something many economists feared at the time–is that, 15 years after the initial crash, people had finally put their finances in order.
The trouble is that fifteen years is too long a time. What’s needed is something to spark an investment boom. Scheiber wants that to be industrial policy:
So far as I can tell, the only solution to the underlying economic problem is something that’s been a dirty word in Washington the last generation or two: industrial policy (that is, an active government role in the development of certain industries.) In his LSE lectures, Krugman quipped that “if someone could invent the 21-st century moral equivalent of the railroad, or actually even the moral equivalent of IT in the ’90s, that would help a lot.” I agree–that would help a lot. But waiting around for this to happen seems risky when the alternative is a decade of stagnation.
He thinks industrial policy can solve this problem. I think this is a bit like solving your problem by assuming a can opener. The problem with industrial policy isn’t that good industrial policy wouldn’t be a good idea, the problem is that nobody knows how to do good industrial policy on a systematic basis. If you scour world history for examples of industrial policy paying off you’ll find some, but you’ll also find tons of failures. Simply wanting it to work doesn’t resolve that issue.
That said, couldn’t the moral equivalent of the railroad be . . . the railroad. High-speed passenger rail is not, in fact, a brand new technology but from the perspective of the United States it might as well be. After all, we currently have exactly zero miles of true HSR coverage in this country. None. And it’s not even remotely a speculative technology it works perfectly well. It’s just expensive to build. Very expensive. But insofar as the idea is actually that we’re looking for very expensive medium-term investments that’s more feature than bug. For that matter, there’s also the very old and extremely proven technology of intra-city heavy rail, i.e. metro systems. Digging subway tunnels underneath developed portions of growing metropolitan areas, packing stations relatively close together, and allowing greater density to arise near the stations is an absolutely proven strategy for driving fixed investment and spurring growth. Again, the reason not to do it is that it’s extremely expensive. But if the view is that we ought to spend huge sums of money on something, this strikes me as more promising than hoping the government can direct future technological development.
Alternatively, Ryan Avent hopes Chinese demand can save the world.