Arnold Kling: Economic Recovery Will Be Fast

By Jul 13, 2009, 1:21 PM Author's Blog  

Arnold Kling: Economic Recovery Will Be FastHow about a little sunshine for a change. Keep in mind that this is opinion and flies in the face of a lot of current data but Arnold Kling is a pretty level-headed economist.

Writing in The Atlantic he makes the following observations:

Sudeep Reddy takes note of an important fact about the current recession:

1. Cutbacks in employment (and, I would add, hours worked) are sharp relative to the cutbacks in output.

In addition, I would point out that:

2. The stock of automobiles is aging, because hardly any new cars have been bought for the past year.

3. Household formation is falling, because people cannot afford to form new households.

4. The rate of homebuilding is way below the long-term trend.

All of these factors will turn around once economic growth picks up. Firms will find themselves needing to add workers in order to meet demand. People will have pent-up demand to form households and get new cars. Homebuilding will actually start to contribute positively to growth.

He also thinks that once Washington gets done with all of their deliberations about health care, cap-and-trade etc. there will be a lot less uncertainty in general which would be another positive. He thinks that commercial real estate and retail are still pretty ugly but overall thinks that once things stop going down the recovery will be brisk and steady. He says no double dip recession.

It seems that his predictions depend on a fairly robust increase in consumption. I think that it might play out that way initially as we bounce off extremely low levels but I’m not sure how much staying power the consumer is going to display. There will be a restocking recovery as firms have to replace depleted inventories so the early numbers when some growth does come may look deceptively positive. I think it will peter our and we’ll either find ourselves in the double dip or flat lining at a low level of GDP growth.

Nevertheless, Kling is a very, very smart guy so I wouldn’t discount his thoughts entirely.

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