A little late, perhaps, but according to the BEA, first quarter growth in real GDP in the US was 2.7%, revised down from a previous 3%. This poses a problem for two reasons; the first is that weak growths obviously means weak recovery. Weak recovery, of course, means that cyclical unemployment turns into structural unemployment — and that is a much bigger policy problem. The second problem (and this is much bigger) is that the long-run trend rate of growth rate from the Great Moderation was around 5%, with +-3% real growth and +-2% inflation. Right now, we are 5-8% below the level of growth we would be at had the recession never happened. The imperative for policymakers is to get the economy back to this level of nominal output as quickly as possible, and 2% real growth (plus near-zero inflation) per quarter is not going to cut it.

Not to mention, the revision puts a bigger dent in the prospects of a “V-shaped” recovery.

This all brings me around to the “new normal” hypothesis. People around where I work and live seem to be very interested in the prospect that we won’t ever recover to our previous NGDP trajectory, and (like the 1970’s) this represents a new normal of lower growth rates (a statement that is usually followed by “higher taxes, and more regulation”). Economists are still debating what caused the shift to lower growth rates in the 70’s; but looking around today there is only one sector in which we should consider lowering output for an extended amount of time, and that is housing. Other than housing, I don’t see any reason to accept the “new normal” hypothesis, other than that it is a choice of the central bank. However, as Scott Sumner points out today, it’s seemingly only a choice of a few members of the central bank, namely: Thomas Hoenig, Charles Plosser, and Jeffrey Lacker. Here is Scott:

Just like in the Great Depression, the regional bank presidents are the biggest problem. And just like in the Great Depression, the British press had a better understanding of the deflationary impact of US monetary policy than did the American press. Funny how things never seem to change.

I hope repeating their names here, in bold, will draw a lot of attention to them.

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