A bottleneck in the economy

The Federal Reserve’s choice to allow only a slow recovery in NGDP has essentially created a bottleneck in the economy, behind which a large crowd of would-be workers is swelling. 

That sentence really captures the US challenge. I recommend this 27 September post by Ryan Avent at Free Exchange, where he attempts to rebut the claim that it is too late for monetary policy to be effective.

(…) Let’s look at some charts. First, here is the year-on-year change in NGDP since 1990:

So, the first thing to note is that NGDP growth is clearly not back to the trend rate for recent expansions. Nominal output routinely grew above 5% per year during the boom of the 1990s (with an average closer to 7% than 5% during the latter, stronger half of that period). Nominal growth decelerated slightly during the 2000s expansion but was clearly and persistently above 5% during the period of meaningful employment growth. Nominal output then shrank at a pace matched only in the postwar period by demobilisation before settling at a rate persistently below 5%. Average year-on-year growth over the whole of this period, including recessions, is 4.7%. Average growth since the end of this recession has been 3.1%. Average growth since the beginning of 2010 has been 3.9%.



Ryan discusses the key points, including the evidence that wages are still sticky three years after the 2008 crash. Read the whole thing.