Fewer jobs and lower growth feature in 'new normal' of US
Saturday November 07 2009
The US economic recovery will probably "run out of gas" as it heads toward a "new normal" of lower long-term growth and higher unemployment than over the previous decade, Nobel laureate Edmund Phelps said yesterday.
The economy "is groggy, but it's getting to its feet", Mr Phelps, who won the Nobel Prize in 2006, said in an interview with Bloomberg.
"We're already seeing a strong recovery, I just think that it's going to run out of gas."
The US unemployment rate rose to a 26-year high of 10.2pc in October, a level not seen since 1983, and payrolls fell more than economists forecast, a report showed yesterday.
That the economy grew the most in two years in the third quarter and the decline in payrolls may bottom in the first quarter of 2010, didn't change the fact the economy had lost its "dynamism", Mr Phelps said.
The jobless rate in the medium term may settle at between 6pc and 7.5pc, he said, speaking before the payrolls data was published.
That compares with a 4.9pc average in the decade through 2007.
"As output goes up, employment is going to continue to lag," said Mr Phelps. "Firms have gotten rid of a lot of their workforce cushion, so to speak, and they're going to do without that for a quite a while."
Mr Phelps, wading into a battle between Keynesian economists favouring fiscal stimulus and neoclassicists, who believe markets best solve economic problems on their own, said both may be ignoring the fact that the economy has changed.
Dynamism
"Neither of these schools recognises the structural changes that the economy is susceptible to," he said. "There are signs that the economy has lost its dynamism, its urge to innovate, or its ability to innovate."
Phelps also said while government stimulus "made sense" during the height of the slump to balance supply and demand, there is less need for it now.
"In that situation it made perfect sense for the government to throw in some fiscal stimulus," he said. "But now we are in an equilibrium. We don't like it, it's a bad equilibrium, but now it's no longer appropriate to think there is an imbalance between supply and demand." (Bloomberg)
Irish Independent
