One Man’s Opinion: Certain Sectors In The Economy Are Heating Up While Others Are Falling Behind

The biggest scar from the Great Recession is going to be a smaller labor force and less investment in the US, but it will be an expansion from the previous so-called new normal level, said Alan Krueger, an economics professor at the Princeton University and former Chairman of council of economic advisers.

Asked to comment on Janet Yellen’s speech at an IMF-led gathering on July 2, Alan said Yellen’s speech was substantive and the depth she went into with her speech was impressive. She rightly said macro-prudential relation is the first tool when it comes to fighting bubbles/imbalances in the financial sector. She couldn’t have been clearer on the matter, he noted.

Asked if Yellen believed the Fed can’t fix bubbles, Alan answered in negative because the Fed is a major regulator. Yellen talked about both underwriting and capital standards, where the Fed plays a major role. The Fed can put in speed bumps that the system needs. On monetary policy, she said interest rate hikes were the last resort to prevent bubbles from forming, he argued.

Asked if bubbles were forming in the economy, Alan said it will be incorrect to say bubbles were forming. However, there’s a spike in leveraged buy-outs due to low interest rates while credit flow to the household and residential sector has been highly constrained. So there is this funny combination where to address one potential area where things are overheating, policy makers are forced to cut another area where things are not heating up enough, he observed.

The latest employment data showed seniors are working longer because they can’t afford to retire since investment incomes are insufficient due to low interest rate. Asked to comment on it, Alan said it’s an interesting development in the labor force statistics where older workers are staying in the workforce longer. It’s a positive development since people are living longer and feeling healthier at older ages. But part of it has to do with the fact that they can’t afford to retire, he noted.

Asked who would be the long-term unemployed that would be left by the wayside, Alan said the long-term unemployed are a mixed group. They tend to be less well-educated and are more likely to be males. Also, they are more likely to come from construction and manufacturing although they are spread all over the economy; 36 percent are from the services sector, he observed.

Asked what economists learned from the recession that started in July 2007, Alan said, personally, he expected a faster recovery. GDP growth has been slower and forecasts were accordingly ratcheted down.

Another important lesson was the magnitude of the financial sector’s impact on the rest of the economy. Also, the housing sector had a major impact on the job market. The problems during the crisis didn’t arise from the job market, but they suffered collateral damage, he explained.

You can watch the video here.