In an economy still suffering from high unemployment and sluggish growth, it can be easy to lose sight of the enormous progress that has been made since late 2008 and early 2009 when the country was losing close to 750,000 jobs per month.
This week’s EPI News addresses both the fragile state of the current economy, and how far it has come. Combined, these two factors show both that the Recovery Act and other policy interventions succeeded in bringing the economy back from the brink, and that more policy action is needed today to put America’s 15 million unemployed back to work.
New report could show a loss of jobs in July
On Friday, the Labor Department will report unemployment numbers for July, and economist Heidi Shierholz says the report will reflect the loss of over 100,000 government jobs (mostly the expected shedding of temporary Census workers). The new report will follow a June unemployment report that showed minimal private sector job creation. Considering that even if the country were to sustain the strongest pace of job growth seen in the boom of the late 1990s (2.6% in 1998), it would still take until 2015 to return to pre-recession levels of unemployment. The much slower rate of growth seen in recent months suggests that without additional policy action, unemployment will remain high for years to come.
New gross domestic product (GDP) data released last week also showed a fragile recovery that was losing its steam. The Commerce Department reported that GDP rose at an annualized rate of 2.4% in the second quarter, a steep drop off from the 3.7% annualized rate in the prior quarter. Economist Josh Bivens, in an analysis of the new GDP data, stressed that even though the economy has now seen four straight quarters of growth, the pace of growth is well below what has typically been seen in periods of economic recovery. Bivens also stressed that the slowdown in growth in the second quarter occurred at a time that Recovery Act investments are still serving to stimulate the economy.
“What will emerge to take up the slack of fading Recovery Act spending is a troubling open question about the economy going forward,” Bivens wrote. “It would be wise for policymakers to provide more fiscal support to the economy, and soon.”
No policy intervention = 16% unemployment
In a new report, Princeton Economist Alan Blinder and Moody’s Analytics Chief Economist Mark Zandi explored the effectiveness of the Recovery Act, the Troubled Asset Relief Program, and all the other policy initiatives adopted in late 2008 and early 2009 to rescue a cratering economy. The report, How the Great Recession Was Brought to an End, estimates that without these various policy responses, nationwide unemployment would be close to 16% today and there would be 8.5 million fewer jobs.
An EPI Economic Snapshot presents some of the highlights from the report.
Blinder and Zandi acknowledge that the state of the economy remains fragile, but they say that it would be much worse had the federal government not intervened. “The Great Recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policy makers.” The fact that unemployment remains as high as it is today speaks to the magnitude of the economic crisis and the need for continued policy intervention to create more jobs.
6-for-6 trigger for major deficit reduction
EPI has recently produced a series of papers and memos that address the federal deficit and outline why major deficit reduction should wait until unemployment has dropped substantially. On August 2, EPI Research and Policy Director John Irons sent a memo to the National Commission on Fiscal Responsibility warning that aggressive deficit reduction could short-circuit the progress the economy has made to date. Irons said major deficit reduction should wait until the unemployment rate has been at or below 6% for six straight months. He said that reducing federal funding too soon could imperil an economy that still has seven million fewer jobs than it did at the start of the recession.
The Briefing Paper, Putting Public Debt in Context, by economist Josh Bivens and researcher Anna Turner provides more context on the recent increases in the federal deficit and shows that, in the midst of the worst recession since the Great Depression, these increases “were inevitable and remain necessary to address the jobs crisis.” The paper also provides historical and international comparisons on deficit levels, which it says shows that reaching historically high levels of debt does not limit the ability to generate economic growth in the future.”
Another new paper, Government Debt and Economic Growth, by Irons and Bivens, directly explores the widespread concerns over high levels of debt, specifically the claims of researchers Carmen Reinhart and Kenneth Rogoff that surpassing a debt threshold of 90% of GDP hinders economic growth. Their paper identifies multiple flaws in the Reinhart-Rogoff research and concludes that “there is no compelling reason to believe the most frequently cited claim…that gross debt of about 90% will necessarily lead to slower economic growth.”
“While we do believe that projected unsustainable deficits in coming decades should be addressed, there is no solid evidence that we are approaching a tipping point,” the authors write. “In fact, the greatest threat to economic growth is policy inaction fueled by deficit fears.”
Economist Paul Krugman cited the research by Irons and Bivens in his New York Times blog, saying it was “the best takedown yet of the Reinhart-Rogoff paper.” Krugman wrote: “I think we can say that this paper has been completely discredited.”
EPI in the News
The Economist also cited the Irons-Bivens paper refuting the Reinhart-Rogoff research, which it said made good points and offered a new way of thinking about public debt. MSNBC cited EPI research about the nearly five-to-one ratio between unemployed workers and job openings. The New York Post quoted international economist Robert Scott in a story about the overseas outsourcing of American jobs. “The situation is very serious and I think it is going to get worse,” Scott said. The Boston Globe quoted EPI data in a story about the Bush tax cuts and how they “did nothing to create jobs.” The Los Angeles Times was among multiple news outlets that quoted Josh Bivens on the slowdown in GDP growth. “(The latest GDP) report provides near certainty that very high unemployment rates will – absent aggressive action by policy makers – plague the economy for years to come,” Bivens told the Times.