While the causes of the economic crisis are varied and complex, the way out is not. Currently, there is insufficient demand to fully employ the people and capital of the United States; it’s estimated that our economy is operating at approximately $1 trillion below its potential. This is why unemployment hovers near 10% and long-term unemployment at near Depression-era levels. (Those who deny that without government intervention we would be in the middle of a second Great Depression are simply not paying attention to the hard data).
Consumers have less money adjusted for inflation than they did years ago, and are hesitant to make big purchases given the uncertainty of their job prospects and the rate of the recovery. They are saving more and consuming less, which is exactly the sensible thing to do. The problem is that in aggregate this reduces GDP and reduces demand, which then reduces income in a self-perpetuating cycle. Businesses are sitting on near-record amounts of cash and are holding back on expansion plans because they’re unsure when demand will pick up again. This too is reasonable, but again makes it hard for the economy to achieve its potential.
Until resources are reallocated and the private sector begins revving up production, the government has two fiscal options. It can try to spur demand through increased spending, or it can sit by while the economy sputters and perhaps suffers a double-dip recession. The Right opposes government spending, contending that the economy will eventually fix itself without intervention; what they fail to mention is that this could take many years, leaving millions of Americans mired in chronic unemployment and misery.
The Obama Administration has done the responsible thing and passed an array of stimulus measures: funds to build infrastructure, middle class tax relief, loans to small businesses, extended unemployment benefits, aid to state and local governments to avert layoffs of teachers, firefighters, and other civil servants.
Monetary policy is another tool, and the Federal Reserve has reduced short-term interest rates to record lows, kept them there for an extended period, and now, through quantitative easing (the so-called QE2) is trying to reduce long-term rates as well. All these moves, in the end, are meant to increase demand and cause businesses to crank up their investment.
Slowly but surely these policies are working.
When Obama entered office, the U.S. was losing jobs at the rate of 750,000 per month; the U.S. economy had lost more than 5 million jobs before any of Obama’s legislation went into effect. In addition, GDP was contracting at an annualized rate of 7%. By contrast, GDP is currently growing in the 2-3% range and we’ve had several consecutive months of private sector job growth. The increase in output and private-sector jobs has yet to make a dent in the unemployment rate (partly, of course, because of government layoffs at the state and local levels), but clearly the economy is moving in the right direction.
No serious economist would contend that Obama’s actions have not significantly helped the economy. There are disagreements on specific aspects of his plans, but there is consensus that things would have been much worse without these efforts.
The Right likes to claim that Obama has overseen a rampant increase in government spending and a massive increase in the deficit, but this is a lie. He inherited a nearly $1.5 trillion deficit, which his administration has actually reduced to less than $1.3 trillion. Tax revenues are sharply down because of the recession, but Obama inherited and did not cause this situation. Government spending as a percentage of the total economy is roughly in line with past levels; the small increases under Obama have been driven by increases in safety net payments that always occur during hard economic times.
Moving forward, the obstacles in the way of full recovery are mostly political. Time is also a factor; there is simply no way for an economy to recover quickly from a shock of the magnitude that the U.S. experienced in 2007-08.
On the political front, the GOP has made it no secret that its primary goal is to defeat Obama and the Democrats—even, apparently, if this means harming the American people and depressing the economy. Republicans oppose any additional stimulus, extending unemployment benefits, the creation of an infrastructure bank, and a sensible energy policy (which could support new green jobs). The party even opposes the Fed’s recent moves to reduce long-term interest rates. All of this, plus their continued insistence on extending the Bush tax cuts for millionaires, makes their talk about fiscal responsibility and deficit reduction a farce.
Unfortunately, Americans just rewarded the Republicans with increased political power in the midterms. Rightly or wrongly, Americans were impatient after two years of near double-digit unemployment and lashed out at the party in power.
But the answer to our ills remains simple:
1. Continued government assistance for the unemployed and those hit hardest by the recession
2. Additional stimulus, especially for infrastructure and state and local governments
3. Expansionary monetary policy that keeps interest rates low
Only when the economy is well on its way to recovery, and the unemployment rate has dropped by a few percentage points, should efforts be made to reduce the federal deficit.
More on the long-term outlook next week.
Jason Scorse