If indeed there is a continuing (modest) recovery, what are we to make of it? I see a few options:
1. Government responded to the downturn with vigorous policy actions and brought recovery.
2. We were in a liquidity trap, but enough depreciation of capital and consumer durables is pulling us out of it. As marginal rates of return rise with depreciation, spending will go up.
3. The neo-Keynesian model applies, and enough nominally sticky decisions have been reset to undo most of the initial negative AD shock.
4. The economy had a strong positive technology shock.
5. A mix of default, savings, and refinancing have led to some balance sheet repair.
6. We had a strong positive AD shock through higher global demand for our exports.
7. Banks recapitalized through playing the spread and now they are lending again to marginal borrowers, thereby spurring economic activity.
8. Recalculation has proceeded apace.
(1) certainly played a role in that the Fed did bring the Funds rate down to zero, expanded its balance sheet and backstop the banks. More could have been done and the downturn– I believe – have been shorter. But, less could have been done and things could be worse, see Europe.
Fiscal policy I think moderated the worst of the downturn but probably played very little role in bringing on the current recovery, though it could have played more.
(2) is my main story and I am sticking to it.
(3) is appealing and seems somewhat true in that land prices, for example, have indeed come down enormously.
(4) No, if anything technology is effectively declining as gains from trade with China are falling.
(5) To some extent but non-financial balance sheets are not in that much better shape. High margin companies are still high margin. Households are still heavily indebted.
(6) No, if anything the export shock is weakening.
(7) This was a pre-requisite but it had occurred some time ago
(8) No, this is basically the same economy that existed in 2003. If anything its changing structurally at a slower rate. For example, here is the log of ecommerce sales as a fraction of all retail sales.