The US economy has just marked two years of recovery from its worst recession since the Great Depression. But few Americans are celebrating; indeed, most believe that the economy is still in recession. No wonder. Although gross domestic product has recovered to its pre-recession peak, employment has not.
The employment decline during the 2008 recession was more than twice as large as those of previous postwar recessions, according to the McKinsey Global Institute. Even if June’s employment report is much better than expected, 14m Americans will remain unemployed and more than 8m will be working part-time because they cannot find full-time jobs.
More than 2m discouraged workers will have stopped looking for work. The fraction of the population working is near a 25-year low. According to calculations by the Hamilton Project, the US will face a “jobs gap” of about 21m jobs – the number of jobs needed to return the economy to its pre-recession employment level and absorb the 125,000 people who enter the labour force each month. At the current growth rate, that gap will not be filled for another decade.
The jobless recovery is also a wageless recovery for most Americans. Corporate profits have soared, claiming an unprecedented share – more than 80 per cent – of the growth in national income since the recovery began. But real average weekly earnings for production and non-supervisory workers have increased by less than 1 per cent since the recovery started. Real median weekly earnings have fallen. Real median household income in 2009 was 4 per cent lower than its pre-recession high and about the same as it was in 1997.
The economy’s shortlived expansion after the 2000-01 recession was the only postwar expansion during which the real income of the median family declined. And job growth during that expansion was less than half of what it was in the previous two decades. In response to meagre income gains and disappointing job opportunities, many households slashed their savings, borrowed against the value of their homes and assumed significant amounts of debt.
In the wake of the recession households are now being forced to curb their spending, increase their saving and reduce their debt. The process of deleveraging has barely started. Household debt has fallen to 115 per cent of disposable personal income from a peak of 130 per cent in 2007, according to Yale university’s Stephen Roach. But the 1975-2000 average was only 75 per cent, so there is still a long way to go.
It is not surprising that many Americans are pessimistic about their economic future. Nor is it surprising that they think jobs should be the top priority for policymakers. They are right. Unfortunately, many members of Congress are not listening. Urged on by Tea Party Republicans interested more in the size of government than the size of the government’s debt, the debate in Washington is focused on deficit reduction rather than on job creation.
It is true that the US faces a major fiscal challenge that must be addressed. But this is a long-run challenge that is primarily the result of rising healthcare costs, the ageing of the population and unwise fiscal choices made before the recession. The short-run challenge is inadequate demand – a gap between the amount of goods and services the economy can produce and the demand for them, caused mainly by the private-sector deleveraging. The long-run challenge calls for fiscal contraction. The short-run challenge calls for fiscal support.
There is a logical way out of this policy conundrum: pair temporary fiscal measures targeted at job creation during the next few years with a multiyear, multitrillion-dollar deficit reduction plan that would begin to take effect once the economy is closer to full employment. Pass both now as a package.
Current signals from Washington indicate that this way out will be not taken: instead, partisanship and politics will trump logic and premature fiscal contraction will undermine the already anaemic recovery. Even worse, a political stalemate over the debt limit could precipitate a financial crisis and necessitate immediate large cuts in government spending that would tip the economy back into recession, driving the unemployment rate into double digits.
But imagine for a moment that logic prevails. What should the federal government do to promote job creation? At the very least, it should introduce additional stimulus measures to offset the substantial fiscal drag – in excess of 2 per cent of GDP – that is slated to occur in this year and next when current stimulus measures introduced at the end of last year expire. On the spending side, it should invest more in infrastructure maintenance and replacement. Such investment raises demand, creates jobs and increases the growth potential of the economy.
Each $1bn of infrastructure investment creates between 11,000 and 30,000 jobs. On the revenue side, the government should extend some of the targeted tax measures enacted at the end of last year including the payroll tax cut for employees and the capital investment expense deduction. But it should also go further and cut payroll taxes for employers on all new hires, including hires by new businessses. This cut should be linked to the unemployment rate and should be maintained until it falls to the 5-6 per cent range.
History suggests that recovery from a debt-fuelled asset bubble and the ensuing balance-sheet recession can be long and painful, with significantly lower GDP growth and significantly higher unemployment for at least a decade. Right now, it looks like the US is on such a course. For many Americans, the first decade of the 21st century was a lost decade for the economy. A second lost decade has already begun. No wonder they think the economy is still in recession – for them, it is.
The writer is a professor at the Haas School of Business at the University of California at Berkeley. She was chair of the Council of Economic Advisers under President Bill Clinton
Stimulus measures over-promise and under-deliver
With the first two fiscal stimulus packages winding down, having failed to produce the promised “lift-off” with self-sustaining growth and improving employment, stimulus advocates are now pointing to upcoming “fiscal drag” when the measures are withdrawn as a reason for still more stimulus. These calls, namely for further additions to debt and deficits, are being heard in the midst talks aimed at major deficit reduction.
Consider the disappointing impact of last December’s stimulus package. Passed just after the Federal Reserve’s November QE2 balance sheet expansion, most forecasters were expecting a growth rate close to 4 per cent during the first half of this year. The outcome will probably be below 2 per cent. Many are blaming the negative effects of higher fuel prices and Japan’s earthquake for slower-than-expected growth.
But part of the disappointing outcome is due to the waning impact of the first stimulus package and a related collapse in construction spending. That the June employment report showed an increase of only 18,000 additional jobs surely falls short of the promises made by advocates fiscal stimulus. The list of disappointments goes on. When the last December’s stimulus is withdrawn at the end of the year, it is estimated to reduce next year’s growth by 1.5 percentage points – and all we have to show for it is a larger national debt mountain, coupled with the need for greater future deficit reduction.
We are learning a basic truth. Fiscal stimulus produces a temporary positive impact on growth and perhaps on employment after it is enacted. This is followed by a drag on growth when it is withdrawn. The net effect over time is highly uncertain but disappointing overall. The stimulus-on, stimulus-off sequence reflects the fact that the spending must be financed by an increase in debt that carries with it the prospect of higher expected future taxes and/or spending cuts. This is especially true as the US debt to gross domestic product ratio approaches level associated with fiscal crises.
With the president and some policy makers calling for $2,000bn to $4,000bn in defect reduction over the next decade – another stimulus package of, say $500bn would only leave us looking for $2,500bn to $4,500bn of defect reduction over the next nine years. That is unless we want to put off deficit reduction steps – again. But that is how we got into this deficit box in the first place.
The writer is a resident scholar at the American Enterprise Institute