The Stimulus Wore Off. What Now?
A great mystery of our time - one that should frame the campaign debate - is why the economic recovery has been so sluggish. Consider this comparison. After the brutal recession of the early 1980s (peak unemployment: 10.8 percent), it took only 11 months for employment to regain its pre-recession level. By contrast, it required 51 months after the Great Recession for employment to reach its pre-recession numbers. Either economic policy let us down or the economy has become less robust. Maybe both.
We expected better. Sure, economic policy probably prevented a second Great Depression, and this was no mean feat. Remember, unemployment was 25 percent in 1933. Since the Depression, economists had supposedly acquired the knowledge to avoid deep slumps and feeble recoveries. So we thought. This failure has led to a search for explanations and villains.
The latest contribution is from Josh Bivens of the left-leaning Economic Policy Institute. His study asks why the recovery is taking so long. The answer, he says, is not enough government spending. More pump-priming was (and is) needed. Federal budget deficits should have been (and should be) larger. Total government spending at all levels (local, state and federal) has been weaker than in past recoveries. The absence of this extra stimulus has held the economy back.
This is the liberal analysis of the sluggish recovery. It could be right. In early 2016, Bivens notes, per capita government spending was 3.5 percent lower than at the depth of the Great Recession. By contrast, at a similar point in the recovery from the 1981-1982 recession, per capita government spending was up 17 percent. If government spending now had followed the same path, says Bivens, it would have been $1 trillion higher in 2015, "translating into several years of full employment."
It's the federal government that should borrow and spend more, says Bivens, because most states and localities are required to balance their operating budgets. (Also, many states and localities don't want to borrow, the Wall Street Journal reports. Despite low interest rates, they're scaling back "spending on aging roads, bridges and buildings," because taxpayers oppose added debt.)
It's a powerful case. If there's too little demand, government should create more. Still, there's room for skepticism.
For starters, the argument that robust government spending fueled fast recoveries in the past may be backward. The causation may have run in the other direction: Strong recoveries may have raised spending, as tax receipts surged and government spent the inflows.
Next, we tried a generous stimulus, and it only partially succeeded. From 2009 to 2012, federal budget deficits - including tax cuts as well as spending increases - totaled $5.1 trillion. On an annual basis, they averaged about 8 percent of the economy (gross domestic product). That's huge. Still, the recovery was tepid, and after 2012, deficits declined (in 2015, it was $439 billion or 2.4 percent of GDP).
The explanation shows the limits of stimulus policies. They are usually intended to be temporary. They cushion the economy while it adjusts to disruptions. Businesses and consumers repay excessive debts. Surplus inventories are sold. Speculative housing prices fall. In theory, these adjustments enable the private sector to resume its role as the economy's main locomotive.
Unfortunately, the locomotive is faltering. The economy didn't pick up after the stimulus wore off. What ails the private sector? Can we do anything about it? Those are the crucial questions.
On the first, theories abound. Some economists see a broad slowdown in technological advances (despite the Internet) whose adverse effects were masked by easy credit. Another theory is that the costs of the welfare state and regulation have come home to roost; they allegedly discourage risk-taking, business investment and work. Another view is that the financial crisis and the Great Recession so scared consumers and businesses that they are reluctant to spend.
Whether we can do anything about this is unclear; but we must at least be clear-eyed about the problem. What's distinctive about today's economic situation is that the problem is global. Almost every major country suffers from reduced economic vigor. Providing more stimulus may seem one response. But it may be shortsighted if it distracts from the more important problem of resuscitating the private sector.
It's worth remembering that China essentially did what American critics suggest we should have done - and should do now. China launched a huge stimulus program in 2008 (bigger than ours relatively) of public-works spending and industry investment. This did shield China from the worst of the crisis. But it didn't solve China's underlying economic problems, which are now worse for having festered.
Can a reinvigorated U.S. private sector escape a similar trap? Or are we fated to ever-increasing deficits? These are the questions that loom ominously over the campaign.