More Growth Needed

Paul Krugman posts a chart illustrating that 3.5 percent growth is not going to result in a rapid fall in the unemployment rate:

Ryan Avent offers more context:

And consider this: the last time the unemployment rate hit its current level was during the recession of 1981-1982 (during which the unemployment rate actually peaked at 10.8% during the final quarter of the recession). Here are the quarterly growth rates for the six quarters immediately following the end of that recession: 5.1%, 9.3%, 8.1%, 8.5%, 8.0%, 7.1%. And at the end of that period, the unemployment rate was still above 7%.

As he says, this implies that even if worried about the sustainability of the Q3 growth pattern prove misguided and we can keep growing at 3.5 percent, “American unemployment will remain near 10% through the end of 2010, at least.”

Two points: One is that incumbent members of congress need to get their heads out of the sand and recognize that they’re likely to be kicked out of office by angry mobs if this comes to pass. A lot of politicians and political operatives in DC are very impressed by polling that shows people concerned about the budget deficit. I think it would be really politically insane for people to take that too literally. If congress makes the deficit even bigger in a way that helps spur recovery, then come election day people will notice the recovery and be happy. If, by contrast, the labor market is still a disaster then people will be pissed off. It’s true that they might say they’re pissed off at the deficit, but the underlying source of anger is the objective bad conditions.

The other point is that we’re largely at the mercy of the Federal Reserve here. And this worries me. Ben Bernanke is a good economist with a good reputation. He’s also a conservative Republican appointed to his job by George W. Bush after loyal service in a previous government job to which he was appointed by George W. Bush. It seems extremely plausible to me that a scenario in which the US experiencing three years of modest economic growth, high unemployment, rising productivity, flat wages, rising corporate profits, and GOP election victories is one he’d consider just fine.