Dean Baker: The End of the US Boom

http://www.nationofchange.org/2015/04/14/the-end-of-the-us-boom/

Other data also should have caused analysts to shy away from any boom view. Investment in plant and equipment has been running just slightly ahead of year ago levels. Home construction is on a slight upward path, but not enough to provide a major boost to the economy. The saving rate is already relatively low, meaning that any big uptick in consumption is implausible barring a surge in income. The trade deficit has been trending upward, partly in response to the rise of the dollar, putting a further drag on growth. And, the proponents of austerity are ensuring that there will be no major boost to demand from the government sector.

In this context, the relatively strong employment numbers had been an anomaly. In an economy with weak GDP growth, strong job growth implies low productivity growth and that is in fact what the U.S. has been experiencing. Productivity growth has averaged less than 1.0 percent annually in 2013 and 2014. This is far below almost anyone’s estimate of trend productivity growth.

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This lack of independent analysis stems from the nature of incentives in the profession. As we saw following the collapse of the housing bubble, no one ever suffers any career consequences from being wrong in the same way as the consensus. It would be difficult to identify anyone at the Federal Reserve Board, International Monetary Fund, or any other major economic policy or regulatory agency who lost their job because they failed to recognize the housing bubble and the risks it posed to the economy. It is unlikely anyone even missed a scheduled promotion.

This means that there were absolutely no negative consequences to being disastrously wrong on an issue where it really should not have been hard to be right. (There was no precedent for the massive run-up in house prices and it was not reflected in any remotely corresponding increase in rents.) On the other hand, standing outside the consensus will always carry risks. No one can ever be certain in their assessment of the economy and people in general are likely to be hesitant to conclude that the leading economists are wrong on major issues.

Given this structure of incentives, economic theory tells us that we should not expect much by way of independent thought on the economy. Most of what we read and hear continues to reflect the consensus view, just as was the case before the housing bubble burst. This is why it is possible for silly views, like the U.S. economic boom, to gain credibility in major news outlets.