What liberals want for the US:
... Robert Lucas, the 1995 Nobel laureate in economics, has spent his career thinking about why economies grow, and in particular about the effect of policy making on growth. From his office at the University of Chicago, Prof. Lucas has been wondering, like the rest of us, why, if the recession officially ended in the first half of 2009, there hasn't been more growth in the U.S. economy. He's also been wondering why this delayed recovery resembles the long non-recovery years of the 1930s. And he has been thinking about the U.S. and Europe.
What if the weak recovery is all the recovery we are going to get?
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Podcast: Listen to the audio of Wonder Land here. .In May, Bob Lucas pulled his thoughts together and delivered them as the Milliman Lecture at the University of Washington, an exercise he described to me this week as "intelligent speculation."
Here is the lecture's provocative final thought: "Is it possible that by imitating European policies on labor markets, welfare and taxes, the U.S. has chosen a new, lower GDP trend? If so, it may be that the weak recovery we have had so far is all the recovery we will get."
The Obama-will-turn-us-into-Europe argument is a staple of the administration's critics. Prof. Lucas's intelligent speculation, however, carries the case beyond dinner-party carping.
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What discomfits him is the similarities in the policy choices that accompanied both delayed recoveries. By 1934, the Depression's banking crisis had been resolved, "yet full recovery was still seven years away," he said in the Milliman lecture. GDP stayed more than 10% below trend. "Why?" The answer, he says, was growth-suppressing policies, such as the Smoot-Hawley tariff, cartelization, unionization and, "most important but hardest to measure, FDR's demonization of business."
By the end of 2008, he notes, the primary storm of the financial panic was essentially over. We did get spending declines in GDP in that year's last quarter and in the first quarter of 2009. "But there is a world of difference," he says, "between two quarters of production declines and four years!" The persistence of growth 10 percentage points below its long-term trend line is troubling.
He credits the current Federal Reserve with avoiding the mistakes of the Depression, properly acting this time as the lender of last resort. With the financial side essentially in order and the recovery stalled, Prof. Lucas sees public-policy analogies to the 1930s: "The likelihood of much higher taxes, focused on 'the rich'; medical legislation that promises a large increase in the role of government; financial legislation that assigns vast, poorly defined responsibilities to the Fed and others."
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A 20% to 40% gap in income levels emerged between the U.S. and Europe, reflecting a lowered European work effort. In Prof. Lucas's view, that gap represents the cost (largely taxes) of financing a larger welfare state from 1970 onward. Other economists, he says, have cited a 30% loss in GDP per person in Western Europe since the 1970s.
The U.S.'s projected long-term welfare costs, including the new health-care law, are the justification the Obama economists give for pushing spending to 25% or more of GDP. The tax increase the president is fairly shrieking for this week isn't for the August debt limit. It's for the next 25 years.
"If we're going to move to a European welfare state," says Prof. Lucas, "we're going to have to pay a European price." And that price could be a permanently lower level of GDP per person. The U.S.'s amazing 100-year ride would slow.
Among the many things any such drop in GDP will siphon away is America's relentless productive vitality. "So much new happens in the United States," Prof. Lucas says. But will it still?
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