Harvard economist Greg Mankiw, author of a leading economic principles text, acknowledges that there exist at least three questions on the current US economy that he is unable to answer.
I have a confession to make: There is a lot I don’t know about the economy. …. So let me come clean and highlight three questions that perplex me. ….
 How long will it take for the economy’s wounds to heal?
…. A striking feature of today’s labor market is the rise of long-term joblessness. The average duration of unemployment is now almost 40 weeks, about twice what it reached in previous recessions. The long-term unemployed may well lose job skills ….
 How long will inflation expectations remain anchored?
…. Inflation expectations are “well anchored,” we are told, so there is no continuing problem with inflation. Rising gasoline prices are just a transitory blip. They are probably right, but there is still reason to wonder. ….
 How long will the bond market trust the United States?
A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms, despite a huge budget deficit, a fiscal trajectory that everyone knows is unsustainable and the failure of our political leaders to reach a consensus on how to change course. This can’t go on forever — that much is clear.
N. Gregory Mankiw, “Economic View: If You Have the Answers, Tell Me“, New York Times, 8 May 2011.
I was thinking of taking up Mankiw’s challenge, but economist Dean Baker beat me to it. I like Baker’s answers, and have nothing to add to them.
Let’s start with questions 2 and 3, because these are easier.
The answer to question number 2 seems obvious — as long as there is no inflation. Why should people expect inflation when they are not seeing any. There is no evidence of generalized cost pressure in the economy as all indexes of wages are showing the rate of wage growth remaining pretty much constant. ….
The answer to question 3 largely follows the answer to question 2. After all, the real threat to those holding U.S. government bonds is inflation, not insolvency …. The United States can always print more dollars to meet its obligations. Greece cannot do the same with euros. ….
Okay, on to question #1. This is obviously a trick question, since it depends on what policies the country pursues. If the deficit hawks get full control over the levers of government and we start cutting spending rapidly, then it will take many many years before the economy recovers.
Similarly, if inflation hawks at the Fed can force increases in interest rates, like their counterparts at the European Central Bank, then recovery can take a very long time.
On the other hand, if we could get another big jolt of stimulus, a more aggressive monetary policy, or a big fall in the dollar to boost net exports, then we could see the economy recover fairly quickly.
Dean Baker, “Gregory Mankiw’s Pop Quiz on the Economy“, Beat the Press, 7 May 2011.
Greg Mankiw (born 1958) chaired President GW Bush’s Council of Economic Advisors from 2003 to 2005. Dean Baker (also born 1958) is co-founder of the Washington-based Center for Economic and Policy Research.