Tag Archives: expansion

Why Has the US Economy Picked Up? Congressional Republicans

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What a difference two months make.   As recently as November, when Republicans scored strong gains in the US congressional elections, the universally accepted explanation was economic performance that was perceived as disappointingly weak.  (As always, “it is the economy, stupid.”)   A substantial share of the American public thought that economic conditions were actually deteriorating last year; many held President Barack Obama responsible and voted against the incumbent party.

Now suddenly everybody has discovered that the US economy is doing well after all.  So much so that Republican leader Mitch McConnell, newly elevated to Senate Majority Leader, has switched from a position that the economy is bad and Obama is to blame, to a position that the economy is good and the Republicans should get the credit.  On January 7, he suggested that recent good economic data could be attributable to “the expectation of a Republican congress.”

But (as many have now pointed out) the improvement in performance began well before the November election.   The brightening also began well before September, the date when polls began to indicate that the opposition party was likely to do unusually well in the vote.

The fact is, job growth was vigorous throughout 2014, averaging 246,000 per month for a year total of three million.  It was enough to bring the unemployment rate down to 5.6% in December 2014 (from 6.7 % in December 2013).   This employment growth represented an acceleration relative to the 185 thousand monthly average of the last three years, 2011-2013.  It looks even better compared to the preceding economic expansion of 2002-2007, when job creation averaged 102 thousand per month, let alone compared to the recession years 2001 or 2008-2009.   It was even as good as the Clinton years!

Similarly, GDP growth began to pick up steam in the spring of 2014, running above the rate of the preceding three years.   It even reached 4.8% in the 2nd and 3rd quarters together, though that is almost certainly temporary.   Europe, in stark contrast, remains in the dumps.  Partly as a result of income growth, the US budget deficit came in better than forecast last year:  2.8 %.  This represents a record improvement relative to 2009, when the budget deficit registered almost 10 per cent of GDP.

Just yesterday, the mystery was why growth was so weak, averaging only 2.1 per cent during the years 2011-13.  There were four kinds of explanations.

The first explanation was the Reinhart-Rogoff principle that recovery from a recession takes longer if the origin was a crash in housing and financial markets.  But there is another principle that the deeper the initial recession, the more rapid the rate of growth per year in the recovery phase.  The point about financial crashes being worse than other recessions is more a statement about the magnitude of the initial decline and the corresponding length of time subsequently necessary to get back to normal, than a prediction about the annual rate of growth during the recovery phase.

The second theory was that the slow recovery was part of a longer-term trend, attributable to secular stagnation or a dearth of new important technological innovations.  It is true that productivity growth and labor force growth have slowed since 1975 and perhaps even since 2000.  But it does not seem wise to explain away three years of weak recovery by means of downward revisions in estimates of the long-run trend in potential GDP.

The third interpretation is that the deep recession of 2008-09 had long-lasting effects via long-term unemployment and depressed investment, and hence on the capital stock and the size and skills of labor force.

The fourth explanation for slow growth during 2011-13, however, seems the simplest: dysfunctional fiscal politics.  These years featured the “fiscal cliff,” debt-ceiling standoffs, flirtation with federal default, a government shutdown, and budget sequesters.  One does not need to assume big Keynesian “multiplier effects” to conclude that the combined effects shaved at least one percentage point from growth each year – especially if one believes that the risk created by such unpredictable behavior discourages firms from hiring workers or undertaking investment.  According to the Economic Policy Uncertainty Index, the debt ceiling crisis of 2011 and government shutdown of 2013 each spiked uncertainty to levels as high as had the terror attacks of 2001 or the Lehman failure of 2008.

Then why stronger performance over the past year?  2014 was the first year, since the Republicans achieved a majority in the House of Representatives in November 2010, that dysfunctional fiscal policy did not actively impede the economic recovery.

The government shutdown of October 2013 was perceived to have turned out politically damaging to Republicans, including by the Republican leadership themselves.  Thus they determined to refrain from such dead-end show-downs in 2014, even though doing so meant over-ruling certain noisy “Tea Party” members.   One could have predicted that a year in which Congress refrained from actively impeding economic growth would be a year when the pace of expansion in output and employment would pick up.  If the new Congress in 2015 refrains from standoffs, sequesters and shutdowns, there is no reason why the economy cannot continue to do well in the new year.

Of course the US economy retains some shortcomings.  Wage growth is still slow.  Median household income has barely begun to recover and remains well below its level of 2000.  The explanation is that most of the income gains have gone to people at the top of the income distribution.   Indeed, of the various possible reasons why the electorate in 2014 did not perceive the economic recovery, the most natural is that the typical American had not shared in the gains.  The irony is that rising inequality is usually thought to play to the Democrats’ electoral advantage.

[A version of this post appeared at Project Syndicate.  Comments can be posted there.]

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The Fiscal Stimulus & Market Turnaround: 5-Year Anniversary

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Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office.   Those who don’t like Obama are still asking “if the  fiscal stimulus was so great, why didn’t it work?”    What is the appropriate response?

Those who think that the spending increases and tax cuts were the right thing to do have given a number of responses, which sound a bit weak to me.  The first is that the stimulus wasn’t big enough.  The second was that the Great Recession would have been much worse in the absence of the stimulus, perhaps a replay of the Great Depression of the 1930s.  (The media are fond of this line of reasoning because it allows them to escape making a judgment.  They can just say “nobody knows what would have happened otherwise.”)    The third response is that the fiscal stimulus was short-lived, and in fact was reversed by the Congress by 2010.

I believe that each of these three statements is true.   But they sound weak because they look like attempts to explain away the absence of a visible positive impact.  Listening to these arguments,  one would think that no effect of the Obama stimulus could be seen by the naked eye in the U.S. economic statistics of 2009.    Nothing could be further from the truth.

Recall the timing.  Obama was sworn in on January 20, 2009. The economy and financial markets had been in freefall ever since the Lehman Brothers failure four months earlier (September 15).   The President quickly proposed the American Recovery and Reinvestment Act, got it through Congress despite strong Republican opposition, and signed it into law on February 17.   

If one judges by the economic statistics, the effect could not have been much more immediate, whether the crierion is job loss, GDP, or financial market indicators.   Look at the graphs below.  

The stock market, which had been falling steeply since September, hit bottom on March 9, 2009, and then started a 5-year upward trend.   The index shown in Figure 1 is the S&P 500.  The turnaround can’t be missed.  Wall Street should get ready to celebrate the anniversary on March 9.

Figure 1

 

 

 

 

 

 

 

Figure 1: Stock Market   
*Click on the chart for larger image

The much-maligned TARP and bank stress-tests also played important roles, unfreezing financial markets.  Bank interest rate spreads were back to pre-Lehman levels by February 2009 and back to pre-subprime-crisis levels by June.

What about the real economy?  That is what matters, after all.   Economic  output was in veritable freefall in the last quarter of 2008: a shattering 8.3 % p.a. rate of decline (BEA).  More specifically, the maximum rate of contraction came in December 2008, according to the monthly GDP estimates from the highly respected MacroAdvisers.   (For charts in the form of growth rates, see Figures 1 and 2 of my post on the 3-year anniversary.)  The free-fall stopped in the first quarter of 2009.   As the GDP graph below shows, economic activity was flat, scraping along the bottom until June, after which growth resumed.   The official end  of the recession thus came in June.   Visible to the naked eye.

Figure4

 

 

 

 

 

 

 

Figure 2: Level of GDP, monthly(Dec.2006-Dec.2013)
estimated by Macroeconomic Advisers
*Click on the chart for larger image

The rate of job loss bottomed out in March 2009.  It is there for anyone to see.   The graph shows private sector employment changes.  Thus the turnaround does not count government jobs directly created by the fiscal stimulus.  Job creation turned positive after the end of the year.  Since then, though employment gains have been much too slow, they have on average exceeded the rate during the corresponding period under George W. Bush.

 Figure 2

Figure 3: Change in Private Sector Employment
*Click on the chart for larger image

Of course there are always a lot of things going on. One cannot say for sure what was the effect of the Obama stimulus. And one can debate why the pace of the expansion slowed after 2010. (My own prime culprit is the switch to fiscal austerity.)

But whether looking at indicators of economic activity, the labor market, or the financial markets, the idea that the fiscal stimulus of February 2009 had no apparent impact in the numbers is wrong.

[Comments can be posted at the Econbrowser version or in the always-lively debate at Economist’s View.]

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Recent Jobs & Growth Numbers: Good or Bad?

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This morning’s US employment report shows that July was the 34th consecutive month of job increases.   Earlier in the week, the Commerce Department report showed that the 2nd quarter was the 16th consecutive quarter of positive GDP growth.   Of course, the growth rates in employment and income have not been anywhere near as strong as we would like, nor as strong as they could be if we had a more intelligent fiscal policy in Washington.  But the US economy is doing much better than what most other industrialized countries have been experiencing.   Many European countries haven’t even recovered from the Great Recession, with GDPs currently still below their peaks of six years ago.

US job growth has averaged 186 thousand per month over the last two years, or 167 thousand per month over the last three years.  Most people are aware of the improvement relative to the horrendous job loss during the 2008-09 recession.   But they are probably not aware of how the recent recovery record looks compared to the previous business cycle, the six years of recovery between the end of the 2001 recession and the economic peak at the end of 2007.  Job growth during those six years averaged 100 thousand per month, substantially lower than now.  The difference is even greater if one looks at private sector jobs numbers, because government employment expanded substantially under the Bush Administration whereas it has been contracting in recent years.

GDP growth has fallen well below 2% in the last three quarters.   But I think we know the reason for that:  dysfunctional fiscal policy.  Washington has been the obstacle to a normal robust recovery, through a combination of such factors as spending cuts since 2011, the expiration of the payroll tax holiday in January 2013, the sequester in March, and now business uncertainty arising from new time-bombs in the next two months, once again the needless result of partisan deadlock over passing a budget and raising the debt ceiling.  Given all that, it is surprising that private consumption and investment have held up as well as they have.

The right policy bargain, of course, is fiscal stimulus in the short term, not fiscal contraction, combined with steps today to address the entitlements problem in the long-term.   That would get us back to solid growth.  Our current pattern of pro-cyclical fiscal policy is exactly backwards.

[Comments can be posted at the Project Syndicate site or at Economist’s View.  I have been appearing on Fox Business, where Stuart Varney again today asked why we aren’t achieving high growth.  He also worries about the recent increase in part-week employment, apparently not realizing that this is an effect of the government sequester.]

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