The Slow Economic Recovery-Becker

The financial crisis produced the most severe recession since the end of World War II in all the important measures of economic performance, aside from unemployment rates. Unemployment peaked at 10.2% in 2009, whereas it peaked at 10.8% in December 1982 at the end of the deep recession that spanned 1981-82. The recovery from that earlier recession was rapid, as unemployment was down to about 7.5% by 1984, and GDP grew rapidly in 1983 and 1984. By contrast, as Posner indicates, GDP growth has been slow to moderate in the two years following the official end in 2009 of the past recession. Real GDP is about 10% below the level it would have been at if growth in GDP continued after 2008 at its long term rate of 3% per year.

At the height of the financial crisis, the media frequently had discussions of the “failure of capitalism”, and the need to radically rein in the private sector through extensive regulations and other government activities. The politically liberal Congress elected in 2008 along with President Barack Obama reflected these views. In addition to taking various steps to try to fight the recession, leading members of the new Congress, and President Obama as well, considered they had a mandate to reengineer the American economy through more radical government interventions (see the discussion of uncertainty and the recovery by Steven Davis, Kevin Murphy, and myself in the Wall Street Journal, January 4, 2010, “Uncertainty and the Slow Recovery”).

In addition to repeated attacks on American business, especially banks (some of the attacks on banks were well deserved), Congress passed an expensive stimulus package that did not stimulate much. The health care bill Congress passed seems likely to increase the cost to small and large businesses of providing health insurance for employees. Congressional leaders proposed high taxes on carbon emissions, large increases in taxes on higher income individuals, corporate profits, and capital gains as part of vocal attacks on “billionaires”. Many in Congress wanted to cap, or at least control, compensation of executives. Proposals were advanced to make anti-trust laws less pro-consumer, and more protective of competitors from aggressive and innovative companies. Congress passed and the president signed a financial reform bill that is a complicated and a politically driven mixture of sensible reforms, and senseless changes that have little to do with stabilizing the financial architecture, or correcting what was defective in prior regulations.

It is no surprise that this rhetoric and the proposed and actual policies discouraged business investment and slowed down the recovery. Yet, I had expected the recovery to speed up after radical approaches to the American economy were repudiated in the 2010 Congressional elections, when many of the more liberal members of Congress lost their seats. For a while the economy did began to pick up, as unemployment declined quite rapidly from hovering around 10% to about 9% at end of 2010, and GDP started growing faster. But then the economy stalled. The challenge is to explain the drift in the unemployment rate during the past several months, and the rather tepid growth in GDP that have raised fears of a “double-dip”.

Some of the slow-down in the American economy is undoubtedly due to problems in the world economy: the excessive Greece debt and other serious economic problems facing a slowly growing European Community, the nuclear disaster in Japan and the sluggishness of the Japanese economy, and the possible slowing of the rapid growth in both the Chinese and Indian economies. Another part is explained by the policies that slowed the early stages of the recovery, perhaps especially uncertainty about the effects of the financial reform act, and lack of clarity about the cost implications to business of the health care act.

I am persuaded that an important third part is due to concerns that the US will be unable to control its fiscal situation. The ratio of federal government spending to GDP grew from about 21% in 2007 to 25% in 2011, a very rapid change compared to the relative stability of this ratio during the prior 25 years. Unfortunately, there is not yet a strong enough will in Congress and by the president to lower this ratio during the coming decade. Indeed, with the looming enormous growth in entitlement spending, especially Medicare, the spending to GDP ratio could well increase sharply in the coming decade, along with the fiscal deficit and the federal debt.

Liberal Democrats continue to be reluctant to agree to big cuts in government spending. Many Republicans have come out against increasing any taxes, even though sensible tax reform toward a flatter and broader based income tax would raise the taxes paid by some taxpayers. The most attractive reform of Medicare put forward by any member of Congress is Paul Ryan’s proposal to provide grants to the elderly to buy health insurance, with the size of the grant falling with the income of the recipient (see our discussion of his “Roadmap” in posts for April 4, 2011). But Ryan’s Medicare proposal has been rejected not only by Democrats, but also by leading members of his own party.

To many investors, the future of the American economy looks dim and also uncertain. I am a perennial optimist about America, but even I have moments of serious doubts: not about the ability to solve these problems, but about the will to do so. The best way to get American fiscal and other economic problems under control, and thereby “stimulate” the economy, is to institute growth oriented policies that would increase the long-term growth rate beyond the 3% average annual GDP growth rate of the past 130 years. These policies include tax reform, cuts in entitlement spending, and more sensible regulations that are less dependent on discretion by regulators (see my post for December 6, 2010 for a discussion of these and other proposals).

 

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Having higher numbers of occupants per existing structure doesn't bode well for selling off the homes having fallen or about to fall into the laps of bankers.All of the sci-fi stories pointed to a shorter work week, more leisure time and industries developing around increased leisure time coupled with the income to enjoy it. We have nothing like that in place or even in mind. Instead those desperate for any kind of job are to work longer hours for less pay and be appreciative for their opportunity.

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As compared to the post-World War II era, Americans with high school diplomas today are much less likely to find manufacturing jobs, because there are 2-3 billion people in emerging economies with similar skills who are willing to work more cheaply in order to have a shot at attaining a middle class standard of living.

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Benji, "fossilized dung" would imply that federal ageenics are inert and non-aspirational. What they really are, instead, is a form of parasitic rot, like necrotizing fasciitis. The difference being that flesh-eating bacteria eventually run out of flesh to eat, while our benevolent government metastasizes into all aspects of our lives, incrementally wearing down our collective economic health.Juandos, in the long term, Prof. Perry will be correct. What's the (by now) old saying? "He's called 13 of the last two recoveries." He and Roubini are of the same cloth...just different ends of the bolt. I don't come here daily to get a jolt of pessimism, but eternal optimism in the face of wealth-destroying policies promulgated by Obama and his minions is irresponsible. We're never going to see the projected growth while we have regulatory uncertainties of the scale that we now have in the US. Magical thinking won't change that.

[Kanha]

"We could be in a full-blown economic mewdtoln and Prof. Perry would yet be trumpeting how peachy keen things are looking"...Hmmm, well skh.pcola I sometimes think that on the odd occassion maybe Professor Perry can be bit overly optimistic...What I've found out though that over time Professor Perry tends to be a correct much more often than not in his calls...Mind you I'm a bit more pessimistic about real GDP growth in the world than Professor Mark is but it won't suprise me one little bit if he turns out to be correct...

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[Sharan]

The government needs to make up its mind. The Fed is tinyrg to start a bubble, while Obama is tinyrg to stop a bubble (a gold bubble doesn't create much value, except generate dollars).Also, it seems, U.S. defense spending as a percentage of GDP was twice as much in the 1960s than in the 2000s (perhaps, that helps explain the protests during Vietnam). Moreover, it was higher in the 1950s than in the 1960s, and higher under Obama than Bush (Obama doesn't do anything cheap).

[Joe]

From your own chart, while the rule may have held last time it happened, on the three priveous occasions in the last 10 years or so that GDP growth dipped below 2%, the US did not go into recession. Don't go looking for meltdown' with such glee, chaps!

[sujittra]

H: "you seem to be suggesting that a laregr safety net has no cost," I am not making that argument - I am pointing out that Lucas refers to slower European growth rates in support of his argument, when in fact the data shows that there European growth rates are not, in fact, slower. Lucas does not seem to describe any other "cost" other than slower growth rates, but the data don't show such slower growth rates. My point is that Lucas' argument in unsupported.---@ SPREWELL: "what is it about Europe or Japan's native institutions that they simply can't hit US levels of GDP per capita or innovation? I think you will find it tough to argue that a preference for leisure explains those gaps away."Totally agree. I just don't think Lucas has made any credible, evidence-based showing that the GDP difference is entirely due to social safety net spending. Which is his entire argument.---@ METHINKS: you sure you want to use Germany as an example of a bad economic story? 2010: 3.6% GDP growth, 6% unemployment, $44,700 GDP per capita. About the same as Wisconsin, Oregon and Rhode Island. The Horror!---@ MORGANIVICH: "this has been the weakest recovery from a recession since ww2." This Great Recession (or lesser depression) is unlike any other recession since ww2. It is the largest financial / balance sheet recession since 1930, which Rogoff and Reinhart show alway lead to very slow, below-normal recoveries. Are you arguing the increased unemployment comp has caused this weak recovery, and not de-leveraging from historical leverage leading to weak end demand? Really?---As an aside, a blog forum does not seem to be the best way to keep up a back and forth discussion. Threaded comment systems are much better.