It’s no secret that America’s recovery from the Great Recession has been unusually
slow. But what’s far less apparent are the reasons for the sluggish rebound.
Republicans claim President Obama’s
economic plans, regulatory actions and new programs such as the Affordable
Care Act are responsible. And they say electing Hillary Clinton would to a large
extent represent a continuation of Obama’s policies.
Democrats see it
differently. They argue that without policies such as the American Recovery and
Reinvestment Act at the beginning of Obama’s presidency, and aggressive action
by the Federal Reserve, the recession could have been even deeper and the
recovery even slower.
My answer is the problem isn’t in the actions the administration took, which were helpful. The problem is Republicans blocked everything Obama wanted to do to help the economy once their party took control of
Congress, and the Republicans’ insistence on pursuing austerity was the
opposite of what America needed.
Let’s step back a bit to see why the Great Recession was such a tough slump to rebound from.
Since the mid 1950s, around when consistent data on the economy
became available, it has generally been true that the
deeper the recession, the faster the recovery. However, recessions have
many causes, and some types of downturns are harder to bounce back from than
others. Notably, none of the U.S. recessions since the mid-1950s was triggered by
the crash of a housing bubble and a severe financial crisis. And as the experience
in Japan and many other countries illustrates, these types of recessions are
notoriously difficult to recover from.
A comparison of the most recent U.S. recession to the one in 1982 is helpful. In both cases, unemployment topped out at around 10 percent to 11 percent (10 percent in the Great Recession and 10.8 percent in 1982), and
the output gap -- the difference between actual output and the economy’s potential -- was estimated
to be over 7 percent (7.1 percent in the Great Recession and 7.6 percent in
1982).
Yet the U.S. recovered much faster in 1982 than it did recently. One
reason for the difference is that the 1982 recession was caused by the Fed’s
tightening of monetary policy in an attempt to reverse the high inflation rates that wracked the country beginning in the 1970s.
Those sky-high interest rates were easy for the Fed to
reverse once inflation came down to acceptable levels. And with interest
rates normalized, returning to work as usual didn’t require much
structural adjustment of the economy. Firms simply had to rehire workers who
had been laid off, and go back to doing things as before.
A recession induced by a housing crash and financial
collapse is different. For one, it wipes out housing equity and financial
wealth, and it takes a long time to rebuild what has been lost.
During the long rebuilding
phase, when income is directed toward restoring savings rather than purchasing goods and services, the economy will grow sluggishly. In addition,
the Great Recession required considerable structural adjustment to move people and
resources out of the overinflated housing and financial sectors and into productive
employment in other sectors.
It takes time for people to find new
occupations, especially if it involves relocating, and the advance
of globalization and technology since 1982 that caused the loss of many decent
middle-class jobs made the search even more difficult.
The loss of housing and financial wealth coupled with the
need for considerable structural adjustment should have caused economists to expect a
slow recovery, and many of us did, but it didn’t have to be this slow.
Economists are in wide agreement that in a deep recession,
monetary policy alone isn’t enough to turn the economy around. The Fed can cut interest rates only so far before running into the zero lower bound (that is, when rates are near zero percent). And
once that happens, its ability to use monetary policy to stimulate the economy is very limited. At that
point, fiscal policy -- which the government controls -- is needed to give the economy the boost it needs.
That brings us to the second reason the economy recovered slowly: the
failure of Congress to pursue the necessary fiscal policy response. Many people
believe government spending went up significantly during the
recession, but that’s incorrect. Here’s a graph of federal, state and local government
spending per person in the last four recessions:
Economic Policy Institute
For the first six months or so after the onset of the Great
Recession, spending followed the usual trajectory. But ever since, it has been
lower than in the past -- much lower than in 1982 -- and, as noted
by Josh Bivens at the EPI (the source of the graph):
“Astoundingly, per capita
government spending in the first quarter of 2016 -- 27 quarters into the
recovery -- was nearly 3.5 percent lower than it was at the trough of the Great
Recession. By contrast, 27 quarters into the early 1990s recovery, per capita
government spending was 3 percent higher than at the trough, 23 quarters
following the early 2000s recession (a shorter recovery) it was 10 percent
higher, and 27 quarters into the early 1980s recovery it was 17 percent higher.”
The main reason for the decline in per capita government
spending was the turn to austerity forced by Republicans in the Budget Control
Act of 2011 along with their refusal to go along with the Obama
administration’s proposals for further stimulus measures. Had government spending simply
followed the trajectory pursued in past recessions (infrastructure
spending was an option we could have pursued but didn’t), the recovery would
have been faster.
Finally, I should add that no compelling evidence shows that tax increases, regulation or Obamacare are the reasons the recovery
has been so slow. Nevertheless, Republicans claim that tax cuts, deregulation and repealing programs such as Obamacare will jump-start economic growth.
The problem isn’t Obama’s economic policy -- except to the
extent he embraced Republican demands for austerity. The problem is the
nature of the recession, that recovery from a housing bubble collapse and financial
meltdown is always slow and Congress’ failure to use fiscal policy to
give the economy the help it needs.
View all articles by Mark Thoma on CBS MoneyWatch»
Mark Thoma is a macroeconomist and time-series econometrician at the University of Oregon. His research focuses on how monetary policy affects the economy, and he has worked on political business cycle models. Mark is currently a fellow at The Century Foundation, and he blogs daily at Economist's View.
Commentary: Why America's economic rebound has been so slow
By Mark Thoma
/ MoneyWatch
Commentary
It’s no secret that America’s recovery from the Great Recession has been unusually slow. But what’s far less apparent are the reasons for the sluggish rebound.
Republicans claim President Obama’s economic plans, regulatory actions and new programs such as the Affordable Care Act are responsible. And they say electing Hillary Clinton would to a large extent represent a continuation of Obama’s policies.
Democrats see it differently. They argue that without policies such as the American Recovery and Reinvestment Act at the beginning of Obama’s presidency, and aggressive action by the Federal Reserve, the recession could have been even deeper and the recovery even slower.
My answer is the problem isn’t in the actions the administration took, which were helpful. The problem is Republicans blocked everything Obama wanted to do to help the economy once their party took control of Congress, and the Republicans’ insistence on pursuing austerity was the opposite of what America needed.
Let’s step back a bit to see why the Great Recession was such a tough slump to rebound from.
Since the mid 1950s, around when consistent data on the economy became available, it has generally been true that the deeper the recession, the faster the recovery. However, recessions have many causes, and some types of downturns are harder to bounce back from than others. Notably, none of the U.S. recessions since the mid-1950s was triggered by the crash of a housing bubble and a severe financial crisis. And as the experience in Japan and many other countries illustrates, these types of recessions are notoriously difficult to recover from.
A comparison of the most recent U.S. recession to the one in 1982 is helpful. In both cases, unemployment topped out at around 10 percent to 11 percent (10 percent in the Great Recession and 10.8 percent in 1982), and the output gap -- the difference between actual output and the economy’s potential -- was estimated to be over 7 percent (7.1 percent in the Great Recession and 7.6 percent in 1982).
Yet the U.S. recovered much faster in 1982 than it did recently. One reason for the difference is that the 1982 recession was caused by the Fed’s tightening of monetary policy in an attempt to reverse the high inflation rates that wracked the country beginning in the 1970s.
Those sky-high interest rates were easy for the Fed to reverse once inflation came down to acceptable levels. And with interest rates normalized, returning to work as usual didn’t require much structural adjustment of the economy. Firms simply had to rehire workers who had been laid off, and go back to doing things as before.
A recession induced by a housing crash and financial collapse is different. For one, it wipes out housing equity and financial wealth, and it takes a long time to rebuild what has been lost.
During the long rebuilding phase, when income is directed toward restoring savings rather than purchasing goods and services, the economy will grow sluggishly. In addition, the Great Recession required considerable structural adjustment to move people and resources out of the overinflated housing and financial sectors and into productive employment in other sectors.
It takes time for people to find new occupations, especially if it involves relocating, and the advance of globalization and technology since 1982 that caused the loss of many decent middle-class jobs made the search even more difficult.
The loss of housing and financial wealth coupled with the need for considerable structural adjustment should have caused economists to expect a slow recovery, and many of us did, but it didn’t have to be this slow.
Economists are in wide agreement that in a deep recession, monetary policy alone isn’t enough to turn the economy around. The Fed can cut interest rates only so far before running into the zero lower bound (that is, when rates are near zero percent). And once that happens, its ability to use monetary policy to stimulate the economy is very limited. At that point, fiscal policy -- which the government controls -- is needed to give the economy the boost it needs.
That brings us to the second reason the economy recovered slowly: the failure of Congress to pursue the necessary fiscal policy response. Many people believe government spending went up significantly during the recession, but that’s incorrect. Here’s a graph of federal, state and local government spending per person in the last four recessions:
For the first six months or so after the onset of the Great Recession, spending followed the usual trajectory. But ever since, it has been lower than in the past -- much lower than in 1982 -- and, as noted by Josh Bivens at the EPI (the source of the graph):
The main reason for the decline in per capita government spending was the turn to austerity forced by Republicans in the Budget Control Act of 2011 along with their refusal to go along with the Obama administration’s proposals for further stimulus measures. Had government spending simply followed the trajectory pursued in past recessions (infrastructure spending was an option we could have pursued but didn’t), the recovery would have been faster.
Finally, I should add that no compelling evidence shows that tax increases, regulation or Obamacare are the reasons the recovery has been so slow. Nevertheless, Republicans claim that tax cuts, deregulation and repealing programs such as Obamacare will jump-start economic growth.
The problem isn’t Obama’s economic policy -- except to the extent he embraced Republican demands for austerity. The problem is the nature of the recession, that recovery from a housing bubble collapse and financial meltdown is always slow and Congress’ failure to use fiscal policy to give the economy the help it needs.
In:- Patient Protection and Affordable Care Act
- Democratic Party
- Republican Party
- Federal Reserve
- Barack Obama
View all articles by Mark Thoma on CBS MoneyWatch»
Mark Thoma is a macroeconomist and time-series econometrician at the University of Oregon. His research focuses on how monetary policy affects the economy, and he has worked on political business cycle models. Mark is currently a fellow at The Century Foundation, and he blogs daily at Economist's View.
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