Jim Tankersley: "Is slow growth America’s new normal?"

At the Washington Post, Jim Tankersley:

Still, many economists, even the ones holding to the “bad luck” story, agree that something has changed in the economy post-recovery; our fireballer, they say, appears to have lost some speed on his fastball permanently. The easiest way to see that is in prices... Prices aren’t rising very fast, even with aggressive monetary easing, but the fact that they aren’t falling probably suggests the demand void — the untapped potential in the economy — isn’t as big as forecasters once thought.

No.

First of all, the argument is based on prices. As if economists understood the forces that drive prices. Tankersley tells the same old "demand-pull" story, the same story you get everywhere from Friedman and Schwartz to Bill Mitchell. But demand-pull stopped being the correct story just about the time Friedman and Schwartz published their book in 1963.

To understand what drives prices now, you have to think cost-push. You have to figure in the cost of finance. You have to allow for the drag, allow for the sluggishness created by the cost of finance. And then you have to allow for all the policy fixes put in place since stagflation arose in the 1970s, fixes that mostly reinforced the problem.

To say that prices aren’t falling "suggests the demand void ... isn’t as big as forecasters once thought" oversimplifies the problem immensely. To say the least.

// Coincidentally related: Analyzing the present