The NY Times Business Section was filled with gloom in an article about the 'new normal':
U.S. Economic Recovery Looks Distant as Growth Stalls
By BINYAMIN APPELBAUM JUNE 11, 2014
WASHINGTON — Recessions are always painful, but the Great Recession that ran from late 2007 to the middle of 2009 may have inflicted a new kind of pain: an era of slower growth.
It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average. Household incomes continue to stagnate, and millions of Americans still can’t find jobs. And a growing number of experts see evidence that the economy will never rebound completely.
For more than a century, the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock. Even after the prolonged Great Depression of the 1930s, growth eventually returned to an average pace of more than 3 percent a year. But Treasury Secretary Jacob J. Lew, citing the Congressional Budget Office, said on Wednesday that the government now expected annual growth to average just 2.1 percent, about two-thirds of the previous pace.
Regular readers, especially those for whom mild OCD is a blessing rather than a curse (I know I am not alone here) know where this mighty freight train is headed. Was it really five years ago that Gregory Mankiw and Paul Krugman scuffled over unitary roots, the inevitability of an economic rebound, and the perils of economic forecasting? Yes it was!
Mankiw, in a nutshell, said that strong recoveries are not inevitable:
According to the conventional view of the business cycle, fluctuations in output represent temporary deviations from trend. The purpose of this paper is to question this conventional view. If fluctuations in output are dominated by temporary deviations from the natural rate of output, then an unexpected change in output today should not substantially change one's forecast of output in, say, five or ten years. Our examination of quarterly postwar United States data leads us to be skeptical about this implication. The data suggest that an unexpected change in real GNP of 1 percent should change one's forecast by over 1 percent over a long horizon.
Krugman, in his typically calm and well-reasoned fashion, explained that Mankiw was scum sucking vermin toadying up to his corporate paymasters. OK, I exaggerate slightly but his response did include "deliberate obtuseness" and "evil".
In any case, Mankiw proposed that Krugman bet on the Team Obama growth forecasts and Mankiw would take the other side. There is no 'man' in Krugman (unlike 'Mankiw'), so the bet was not taken up. Shrewd move - Team Obama had predicted an increase in real GDP of 15.6% from the end of 2008 to the end of 2013; the actual result was a real GDP increase (in chained 2009 dollars Gdplev, BEA, .xls) of, well, 6.3%. Ooops. Score one for evil obtuseness and the new normal.