There is no path to recover towards. Any time we measure the deviation of where the economy is from where we think it ought to be, we have to make a guess about where that is. We rarely ask if that question has any meaning at all. An example may help. When Super Bowl XLVII started, we might have looked at the 49ers average of 24 points per game and forecast them to score that many. But, by the time the power outage hit, they had only scored 6 points, with less than half the game left. At that point, everyone would say they might get 6 points more in the second half (matching the performance they’ve already put up), or perhaps 12 more points (because that’s their historical rate for a half). We would not say that the season average of 24 points is some sort of attractor that has the power to force them to score 18 more points in the second half to make this particular game consistent with the historical average (this is why it was such an exciting shock when they did just this). But, that is exactly what we do with the economy when we say it is still 5% off where it should be, and that there is a problem with its performance because it isn’t closing that gap. The only gap we’re sure of is the one in the past, and it’s a non sequitar to assume there’s one in the future too.
There’s an arthouse film called Thirty-Two Short Films About Glenn Gould. You’re getting Twenty-Six Short Posts from Dr. Tufte. :) These are on why it’s difficult to understand the current macroeconomic situation.
Joe Baker is not a macroeconomist, but we all do a little bit of everything at SUU, so he has to teach principles of macroeconomics sometimes. The other day he asked for pointers about summing up for his students why we can’t quite figure out what’s wrong with the economy. I came up with 26 reasons, most of which have been discussed in class, and all of which are now required.