There were some interesting comments on my previous post arguing that energy shocks may have a key role in explaining the slower-than-normal pace of the current expansion. I think it worthwhile to respond to a couple of them up here, "above the fold."
pgl, proprietor of Angry Bear, writes:
Your post got me thinking in terms of "transmission mechanism" and all that ala the late 1970's / early 1980's recessions. Back then, we claimed oil shocks led to inflation and tight money (Volcker policy choice). And yes, we had an investment-led recession as real interest rates went up. The 2001 recession was also investment-led. Greenspan did tighten monetary policy for a while and then did a very rapid about face. But business investment has remained weak even as short-term interest rates have been quite low. So what are the old geeks like myself missing in terms of the transmission mechanism?
I think I probably count as one of the old geeks too, but I'll give it a try. There is an argument -- Ben Bernanke is a leading proponent -- that previous oil shocks were followed by, or coincided with, recessions because they were accompanied by monetary tightness. That, as pgl points out, might include the 2001 episode. So the case exists that the bigger issue is monetary policy, not the oil shocks.
Perhaps, then, the 2002-2003 shocks haven't turned into full-scale downturns because they were not accompanied by restrictive monetary policy. (In another comment, Phil Miller suggests that the difference this time around may be that these recent price increases were demand driven -- from China and India, in particular. Interesting idea, although that would still make the increases external to the US -- or exogenous, in econgeekese. My intuition is that that is what really matters.)
pgl is precisely right, of course, about investment -- or lack of it -- being a key part of the pre-recession, recession, and recovery periods (the first half of the recovery period, anyway). But I don't find that all that hard to reconcile with low interest rates. If the shocks to the economy fundamentally reduce the perceived return to capital, and hence lower the growth of investment demand, interest rates are likely to be low. In other words, low interest rates will not stimulate investment if the reason interest rates are low is because investment demand has fallen. (I'm being a little sloppy here -- low borrowing costs will cause investment to be higher than it would be if rates didn't budge at all, but that effect needs to overcome the impulse that caused firm expenditure to retreat in the first place.)
Now, why desired investment has been so low is an interesting question (as is this one). I have often suggested that Y2K was an underrated event. It, in effect, had some of the characteristics of a regulatory shock -- like the government telling you that all the investment you planned to do in the next five years had be done by midnight December 31, 1999. How far can that story be pushed? I don't know. Recessions really are perfect storms -- a whole bunch of not-so-great things (energy shocks, monetary policy, this and that) happening at once. But I'm very interested in others' views on this.
MINOR UPDATE: I wrote this post a bit hastily, and there were some typos. i corrected those, but did not change any of the substance.