Tag Archives: recovery

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 Middle Class Crunch: Bipartisan Program for New Members of Congress

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       On December 3-5, 2014, the Institute of Politics at Harvard University held its biannual Bipartisan Program for Newly Elected Members of Congress.  Most of the congress-people come.   This year I was on a panel on the domestic US economy, titled the “Middle Class Crunch.”    In Part I, presented here, I briefly reviewed recent economic statistics.   Part II, laying out 8 recommended policies, will follow.

       The standard economic statistics indicate that the US economy has been doing well lately, not just relative to the severe 2007-09 recession, but relative also to what most Americans think and relative to how other advanced countries are doing.  This applies to (1) GDP, (2) jobs, (3) the stock market, and (4) the budget.

      (1)  GDP growth has averaged an impressive 4.2% over the last 2 quarters.   It has averaged a more moderate 2.4% over the last 4 quarters, but even that is still above the disappointing 2.1% in 2011-13.  See  Figure 1.

Figure 1. Growth has been gradual since the recession’s end in June 2009, but faster lately

Picture1_billionsofchaintype2009dollar

Source: Macroeconomic Advisers, Nov. 18, 2014; monthly numbers derived from US Bureau of Economic Analysis quarterly series. E

        (2) Employment growth has shown  an unprecedented string of positive numbers. The private sector has added 10.6 million jobs over 56 straight months of job growth, easily the longest streak on record. and has added at least 200,000/mo. for nine consecutive months. See Figure 2.

Figure 2.  Change in private sector employment.

Picture2_privatesectoraddedjobs

     (3) The stock market is setting record highs.

(4) The budget deficit has experienced a record improvement since 2009: a decline of more than 2/3.  (See Figure 3.)   It is now  2.8% of GDP, which is below the average deficit since 1980 (3.2%).

Figure 3. The 2014 federal budget deficit is down to 2.8% of GDP.

Picture3_2014federalbudgetdeficit

      If the economy is doing so well, then why don’t Americans see it that way?   The “middle class” doesn’t feel better off because the gains have accrued to people at the top. Median family income  is still 8 per cent below its pre-recession level and even further below its 2000 peak.  It has barely risen above its 1990 level.  See Figure 4.

Figure 4. Real median household income is barely above its 1990 level.

Picture4_whydoamericansfeelworse

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One Recession or Many? Double-Dip Downturns in Europe

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The recent release of a revised set of GDP statistics by Britain’s Office for National Statistics showed that growth had not quite, as previously thought, been negative for two consecutive quarters in the winter of 2011-12.  The point, as it was reported, was that a UK recession (a second dip after the Great Recession of 2008-09) was now erased from the history books — and that the Conservative government would take a bit of satisfaction from this fact.    But it should not.    

Similarly, in April of this year, Britain was reported to have narrowly escaped a second quarter of negative growth, and thereby escaped a triple dip recession.   But it could have saved itself the angst.

The right question is not whether there have been double or triple dips; the question is whether it has been the same one big recession all along.  As the British know all too well, their economy since the low-point of mid-2009 has not yet climbed even halfway out of the hole that it fell into in 2008:  GDP (Gross Domestic Product, which is aggregate national output) is still almost 4% below its previous peak, as the first graph shows.   If the criteria for determining recessions in European countries were similar to those used in the United States, the Great Recession would probably not have been declared over in 2009 in the first place.   

Recent reports that Ireland entered a new recession in early 2013 would also read differently if American criteria were applied.  Irish GDP since 2009 has not yet recovered more than half of the ground it lost between the peak of late-2007 and the bottom two years later.  Following US methods, the end would not yet have been declared to the initial big recession in Ireland.   As it is, a sequence of tentative mini-recoveries have been heralded, only to give way to “double-dips.” 

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