May18 ,2012
The Endless Republican Depression
Last week the April jobs report came out showing meager gains of about 115,000 jobs for the month, though that hid the fact that the private sector added 130,000 while the public sector fired another 15,000. While the Republicans have been blaming too much government spending as the reason for this recession, in reality about a million government workers have lost their jobs, mostly state and local employees, over the last four years. If they were still working, and the add-on benefit to the economy of their spending was accounted for, we’d have close to two million more employed and an unemployment rate under 7% now. What we needed to have done was continued to borrow free money to avoid this unnecessary austerity that is being forced on America out of spite by the Republicans in Congress.
The 2007-2009 recession was exceptionally brutal, the worst since the Great Depression itself. To respond to it we needed clear thinking about the economy, but instead we got way too much nonsense about inflation and too much debt and the obstructionism of the Republicans to appropriate fiscal policy.
The economy can seem a very complex beast, but the government basically has two different ways of dialing up and down economic activity. There is direct spending by government, which is called fiscal policy, and there is control of interest rates by the central bank (The Federal Reserve, run by Ben Bernanke, not the President or Congress) which is called monetary policy. Think of these as two sets of accelerators and brakes. When the economy is booming, there is a risk of inflation as all available capital and labor is being used, so the government needs to tap the brakes and slow things down. It can do this by fiscal policy (cut spending or raise taxes), or monetary policy by raising interest rates. Conversely, when the economy is in recession, and operating below potential with plenty of idle capital and labor, that is the time to step on the gas, either through fiscal policy with higher spending and lower taxes, or monetary policy through interest rate cuts.
Over the last three decades, the Federal Reserve got so good at managing the speed of the economy, that it seemed like monetary policy alone was sufficient. Between 1982 and 2007 we enjoyed essentially a long period of growth interrupted by two short and shallow recessions. The difference this time was the depth of the recession. There is now about a trillion dollars of missing output and millions of unemployed people. Bernanke did the right thing, he has pushed interest rates to zero for short-term lending, and even 10 year US government bonds carry interest rates under 2%, while borrowers with good credit can get home mortgages and car loans under 4%. Despite Bernanke pushing the monetary peddle to the floor, the economy remains listless. Growth has returned since the summer of 2009 to the long-term trend, but we have not caught up to our long-term trend line and returned to full employment.
The problem is that in a depression, which is what we are in, monetary policy no longer works, because the interest rate it would take to revive the economy would have to be a negative number, and even Bernanke can’t take rates below 0. This zero lower bound is what has kept the Fed from defeating this depression. What needs to happen is that we press hard on the fiscal gas pedal until we return the economy to full employment. This is not the time for government “austerity”. Austerity should happen when we are back at full employment.
If we borrowed a trillion dollars and put two million people back to work, either directly as schoolteachers and college professors and court clerks and DMV employees and police officers, or indirectly by hiring construction companies to rebuild infrastructure, it would end this depression. Rising employment would reduce government expenditures on food stamps and Medicaid and unemployment insurance (unemployment insurance expenses alone are 100 billion dollars above 2006 levels) while adding to consumer spending and helping people to afford homes and revive the housing market and construction. The US can borrow for 10 years at 2% interest, which means this added debt would cost only 20 billion dollars a year, and the tax revenues plus reduced expenses associated with two million more employed people would more than cover that cost.
But isn’t it true that we can’t afford to borrow more money? That’s the Republican line that has prevented the government from acting, but it makes no mathematical sense. The budget deficit currently is 1.2 trillion dollars, or roughly 8% of GDP. In general a deficit under 3% of GDP is considered tolerable, and under 2% is quite conservative. To get from 8% to 2% is not that hard, once this recession ends. We are spending 2% of GDP on income support helping the hardest hit, once they are working those bills go away. Another 150 billion per year was being spent in Iraq and Afghanistan, we are now down to 100 billion and should be down below 20 billion by 2014. But the real secret cause of the deficit is the sharp reduction in taxes. Because of the recession the Federal government is only collecting 15% of GDP in taxes, well below its normal take of 19%. We undo all these elements and the deficit disappears. Not to mention once we put our idle workers back to work, the GDP is a trillion dollars larger, and the government gets even more tax revenue from that. Just as a negative spiral takes hold during recessions, a positive one takes hold once we get a self-sustaining recovery. We just need to light the spark, and a big jobs program would do the trick.
John Maynard Keynes laid all this out 80 years ago when he explained to a flummoxed world why the Great Depression would not end, and what it would take to cure it. Those lessons learned have now been forgotten by many, and an anti-Keynesian bias has taken hold among conservatives. For the last 4 years they have been claiming massive inflation would occur if we stimulated the economy, and that austerity was the answer, as it would restore “confidence”. Business does not lack confidence, it lacks paying customers. Just look at Europe, which has gone for austerity all-in. Both in Britain and in the Euro Zone the economies have gone into a second recession, with unemployment rates rising again, and GDP dropping. While the US has grown much too slowly, we at least have refrained from shooting ourselves in the foot. But we can do better.
