Over at Equitable Growth: The extremely sharp and hard-working Neil Irwin has a nice piece that gives his answer:
Neil Irwin: Why Is the Economy Still Weak? Blame These Five Sectors: "The economy keeps underperforming...
...producing around $800 billion a year less in goods and services than it would if the economy were at full health, and as a result millions of people aren't working who would be if conditions were better. But why?... To get at an answer, we needed a more basic question: What would the economy look like right now if it were fully healthy, and how is the actual reality... different?... A handful of sectors, including housing, government spending and spending on durable goods, are at fault for the continuing underperformance of the American economy... Six of 11 sectors we analyzed are doing fine... consumer spending on services... spending on non-durable goods... Business spending on intellectual property... Read More
The following, however, are the five pieces... [are] vastly undershooting... residential investment; consumption of durable goods; state and local government spending; business investment in equipment; and federal government spending. Together their deficit adds up to $845 billion - in other words, if those sectors returned to their typical share of economic potential, the economy wouldn't just be doing well, it would be in an outright boom...
Housing is the biggest and least surprising... Federal spending is below the level that would be expected... State and local governments spent the years after the crisis cutting employees and trimming costs... Durable goods consumption is $178 billion lower than it would be in our model of a fully healthy economy. This is most likely related to the same factors holding back housing. People aren't buying cars, furniture and other big-ticket items as past patterns would suggest, perhaps related to the overhang of debt... It's no mystery which sectors are to blame for the crummy economy...
I look at it somewhat differently:
First, figuring out what the services spending trend is, is extremely hairy--I have no confidence in my own estimates of how fast we "should" be shifting toward a service economy, let alone anybody else's.
Second, if you add up all the components of consumption--services, non-durables, and durables--what I, at least, get is that they are jointly low because income is low and not because of any deeper cause: boost the other components of spending and they will, as a group, recover.
Third, there is something odd in the mix of consumption spending: too much in services and too little in durables. I blame this on the overhang of debt and on the failure to fully fix the breakdown in the credit channel. But while this distorts the pattern of what we buy--we would be happier buying fewer services and more durables, if those who would like to buy durables could get the credit--and distorts our allocation of labor and structure of production, the odd mix is not a cause of the shortfall.
Fourth, business equipment spending is also low not for any fundamental reason but because output is low: with low production, you have idle factories, and it would be silly to build capacity ahead of demand.
Thus, five, the shortfall in the economy is at base due to two sectors: residential construction--and here the Obama administration's extraordinary unconcern with and unwillingness to fix housing finance must take the major part of the blame--and austerity both at the state and local and at the federal level. If we were to fix those two--housing and government--the economy would be fine right now, and the Federal Reserve would already have raised interest rates away from the zero nominal lower bound.
Now you could go a bit deeper, and say: OK, housing and government are depressed. But the economy should be able to route around that and rebalance itself. Workers who would, if things were healthy, be producing thing for the government to buy or building housing could work in other sectors, after all, and now a great many of them are doing nothing at all. There, I think, we have to blame the zero lower bound on nominal interest rates--and the failure to effectively summon either the Confidence Fairy to boost business desire to invest or the Inflation-Expectations Imp to reduce household and business desire to save. At this slightly deeper level, given government austerity and housing credit-channel dysfunction, it is the Wicksellian excess of the market interest rate at its nominal lower bound of zero above the natural interest rate that keeps the economy from rejiggering asset prices and incentives and producing a labor market where demand balances supply.