WASHINGTON – The United States is poised for its strongest year of economic growth since the recession began. Signposts for the economy generally are pointing up. A recovery that seemed tentative and halting a year ago now appears to be durable and more deeply entrenched.
It should. Those are all phrases from an article that ran Dec. 31, 2010, in the Washington Post, projecting how the economy would fare in 2011. I know because I wrote it.
If your memory is shaky, here’s what actually happened in 2011: There was a disruptive earthquake in Japan, an oil-price spike caused by the Arab Spring, a euro-zone crisis that was so severe as to endanger the entire global financial system, a confidence-shattering debt-ceiling showdown in the United States, and austerity by state and local governments that sapped growth. The U.S. economy kept progressing, but at the same kind of sluggish, uneven rate it had in 2010 and, for that matter, would have in 2012 and 2013.
One lesson from this is to view any predictions of what will happen in 2014 through a lens of skepticism. Year after year, forecasters have predicted better days just around the corner, only to see the U.S. economy disappoint.
Cause for hope
Yet here’s the case for optimism in 2014: The forces that have held back growth for the last half a decade are abating. Fiscal policy will be less of a drag in 2014 than it was in 2013. The recoveries in housing, consumer spending and business investment show signs of remaining underway.
And threats from abroad look to have dissipated, with scant evidence of a new looming euro-zone crisis or recessions in China or other emerging markets.
So the case for better U.S. economic growth in 2014 – something in the 3 percent to 4 percent range rather than the 2 percent to 2.5 percent range we’ve been in nearly five years – is that all the forces that might tamp growth are in abeyance. That should allow the natural regenerative power of the capitalist economy to spring forth and return to something closer to full employment.
That’s the theory, anyway. And this year should provide an answer to one of the biggest questions to haunt the U.S. economy during the last half-decade: Has the recovery been crummy because of bad luck or because something was fundamentally broken about the U.S. economy?
The first possibility is that the economic recovery has simply been burdened with bad luck mixed with some bad – but identifiable – policy choices.
In 2011, as I said above, a string of geopolitical events and natural disasters held back growth, particularly the euro-zone crisis, which kept financial markets on the verge of coming unglued for much of the year. In 2012 and 2013, it was the federal government tightening its purse strings.
If this story is correct, then the fundamentals of private demand have been strengthening. Housing has been recovering steadily for more than a year, but home construction is well below historical trends and so should still have room to go.
Businesses have been reluctant to invest for years but could finally start to pick up the pace as the world’s economic luck improves; consumers, buoyed by rising stock and home prices and an improving job market, will do the same. All that will create a positive feedback loop. More confident consumers buy more stuff, leading businesses to invest and hire more to satiate the demand, in turn creating more jobs and boosting wages.
That’s how we could end up with a long-awaited year of above-trend growth, the 3 or 4 or 5 percent expansion that would go a long way to ending the tired economic doldrums.
Cause for fear
Unless, of course, the other theory of why growth has been so disappointing turns out to be true. Maybe weak growth has been caused not by bad luck but by something more fundamentally broken in America’s economic machine.
Why is it, advocates of this theory would observe, that growth was unimpressive even in the first years of the last decade, even before the crisis – even in the midst of an epic housing and credit bubble?
Could the crisis have represented not a short-term aberration, soon to reverse, but instead a lower economic potential for the country than had seemed? If this is the real narrative, then maybe the weak growth of the past few years has been the story of a broken U.S. economy returning to its previous form.
Forecasters are complacent about the risks facing the United States in the next 12 months, seeing little reason to fear a new global financial crisis or wave of fiscal tightening or oil-price spike.
Assuming they are right, 2014 is the ultimate test of the two theories.