What’s your overall assessment of the U.S. economy as the new year begins, and what’s your forecast for how 2014 will compare to 2013?
The economy overall has been slowly improving, and I agree with most economists that this year should bring a further modest expansion of GDP and employment, without any real inflationary pressures. But that overall story obscures the fact that there really are two very different experiences going on in our economy right now. One is a strong expansion for a small minority at the upper end, while there is stagnation or worse for most other people.
Since the financial crisis, the famous 1-percenters—and maybe a few more—have again seen rising incomes, good jobs, and a return to something like the good old days. But for a great many other people, there has been little or no progress—not in the last five years, maybe not for 10 or 20 years. Worker wages have stagnated, real incomes are actually shrinking, and jobs remain very scarce. The December jobs report underscores this concern—long-term unemployment remains at historically high levels, and so many people have abandoned even looking for jobs that the labor force participation rate has fallen to levels not seen since the 1970s. So we should not be at all satisfied with an overall average improvement, which is made up of two pretty unequal experiences.
What key domestic factors or trends will you be keeping a close eye on in 2014?
There are a number of things to keep an eye on as we look forward this year. One is whether we will be able to resurrect fiscal policy, or one party in Washington will continue to prevent half of our policy tools from even being used? We should be using the full force of fiscal policy—something like the stimulus of 2009 but better applied—but instead we have had sequestration, fiscal cliffs, government shutdowns, near-default on our debt, and end of long-term unemployment assistance. It’s hard to conceive of a list of things that could be making matters worse, so if there are any remaining optimists among us, they might still be hoping for better policy out of Congress this coming year.
Another issue to watch out for is the re-emergence of bubbles in some markets. I teach a course on the economics of bubbles and the financial crisis, and as my students know, we are starting to see classic indications of new bubbles in some markets—housing, commodities, and even stocks. This is genuinely worrisome, since the last bubble crisis cost taxpayers a large fortune, and if those forces are unleashed again, we could be in for more trouble.
Janet Yellen is expected to take over as the Federal Reserve’s new chairman on Feb. 1. What do you expect her agenda to be, and how might it impact the U.S. economy?
I have watched Janet Yellen’s career with some interest since she and I were undergraduate economics majors together at Brown University. In some ways she represents a pretty smooth transition from the current chair Ben Bernanke. Yellen has been vice chair of the Fed and has supported current policy. She is not going to change that dramatically, much less go back to the disastrous Fed policies before Bernanke.
But in other ways I think Janet Yellen will be different. She has strong academic credentials as well as deep policy experience. Her judgments about the economy and necessary policy have proven correct over and over again. The Wall Street Journal graded 14 top Fed policymakers for the accuracy of their predictions for where the economy was heading, and her predictions came out as the very best.
Plus, Janet Yellen does not reflect the Wall Street-Washington axis and has not shied away from advocating regulation of the handful of overly large banks in our economy. And she has long argued that the Fed should take more seriously its charge to promote full employment. Since that’s the major challenge of our times, by itself that would make her the right person for this job.