Recent U.S. economic news has been disappointing. GDP may be growing but it is growing very slowly. Job creation is even more sluggish. The civilian labor force participation rate, i.e., the percentage of civilian population employed used to stand above 66% before the recession. This statistic has experienced a steady decline since the recession hit in 2008 so that it has fallen to 63.5% and it shows no sign of increasing. That’s a significant block of Americans no longer in the work force.
In addition, we have an increasing number of Americans who have remained unemployed for a very long time, and younger Americans have had a difficult time entering the workforce at all. 5.6% of the workforce is unwillingly part-time.
Over a year ago in 2012, the Atlantic offered up a number of charts comparing the recovery from this recession to other recessions in the past. That news is not so good either:
- GDP is growing more slowly than in recoveries past. Almost half as slowly.
- Housing prices, which represent Americans’ wealth, have recovered somewhat, but they were continuing to dip in 2012. On average, recoveries have seen increases sooner.
- Non-farm payrolls are increasing very slowly. A number of observers have pointed out that the stock market and corporate profits generally are doing quite well, but payrolls have not returned to pre-recession levels.
- Curiously and maybe even counter-intuitively, industrial production has been tracking close the average recovery, but there has been so little investment that capacity has shrunk whereas in other recoveries it grows.
- A final curious statistic: miles traveled has been almost unchanged since the start of the recession.
So the economy has been improving certainly, but it has been improving very slowly. Why?
Causes of our weak recovery
At a speech this February, Janet Yellen lays out why. The economy suffered a large banking crisis followed by an unprecedented bursting of a housing bubble. “Businesses slashed capital spending and payrolls… GDP contracted by 4.7%.” It was also a long recession lasting almost twice as long as the post-war average.
- Weak fiscal response. Initially, the Obama Administration asked for too small a stimulus package. Then, it bargained that down smaller and also bargained some of the stimulus into less effective tax cuts rather than into outright spending.
- Offsetting the stimulus was the severe contraction of state and municipal budgets leading to large lay-off of teachers, police, firemen, and other state and municipal workers. After losing the House and any possibility of overcoming filibusters in the Senate, Democrats were no longer able to pass further stimulus spending after 2010. Even in 2009, stimulus spending was a hard sell to the more conservative parts of the Democratic Congressional caucus. In addition, state governments, which cannot deficit-spend, often raised taxes during this period contributing to the resistance recovery has to overcome.
- Housing investment has not picked up. With House Republicans eager to dismantle Freddie and Fannie, the mortgage market may soon experience steep increases in interest rates which will further hammer housing investment.
- The drop in housing prices also causes a large drop in household wealth, thus diminished spending, and diminished economic activity.
- Expectations of the economy have also remained uncharacteristically low. Lack of “faith in Washington” has an effect on how much people are willing to spend.
- The crisis in Europe, where one currency but many countries, has meant that problems that federal government patches up with Florida threaten to sink Spain. This has had a depressing effect on our economy.
- Not pointed out by Yellen is also the slowing down that the Chinese economy is experiencing.
Political causes of our weak recovery
- The stimulus in 2009 was far too small. The Obama Administration never advocated for an adequate one and never once complained that the 2009 stimulus had been too small, or needed to be supplemented given experience.
- Democrats were not fully united in 2009 behind a fiscal response to the recession. This gave enough room for Republicans to limit and then prevent stimulus spending.
- The popular base of the Republican Party has been encouraged to leave the orbit of reality and drift off into crazy conspiracy theories, non-arithmetic economics, and libertarian fantasy. This has made it impossible for Republican office holders to act responsibly in matters fiscal or fiduciary.