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News from EPI Economy still reeling from Great Recession, new EPI paper finds

For Immediate Release: Thursday, February 14, 2013 Contact: Phoebe Silag, Donte Donald, or Dan Crawford 202-775-8810

Economy still reeling from Great Recession, new EPI paper finds

An EPI report released today looks back on the five years since the start of the Great Recession, showing just how far the economy remains from full recovery and highlighting the dangers of prioritizing deficit reduction over job creation.

In From Free-Fall to Stagnation, EPI Research and Policy Director Josh Bivens, EPI Federal Budget Policy Analyst Andrew Fieldhouse, and EPI Economist Heidi Shierholz look at the ongoing impact of the Great Recession, which began in December 2007 and officially ended in June 2009. Even three-and-a-half years after the recession’s official end, the economy still needs an additional 9.1 million jobs to restore the labor market to prerecession health. This jobs gap is driven by a persistent output gap—at the end of 2012, national output was roughly $1 trillion (5.9 percent) below where it would have been if the economy were at full employment.

The weakness in the economy is almost entirely due to a lack of demand—households, businesses and governments are not spending enough to keep productive resources fully employed. Given this demand shortfall, expansionary fiscal policy remains the most effective policy lever for boosting demand. Instead of rushing to cut spending, policymakers should be targeting higher deficits in the short term to finance job-creating initiatives.

Unfortunately, deficit reduction is likely to exacerbate today’s economic weakness. For example, in the recent “fiscal cliff” and lame-duck budget deals, policymakers blunted the force of coming fiscal austerity by just enough to avoid an outright recession, but did nothing to move the economy towards full recovery. While the cliff may have been averted, it remains the case that fiscal policy will push overall growth rates below what is needed to move the economy back toward full employment in the coming year. Even the economic investments and fiscal stimulus called for by President Obama in his State of the Union address do not go far enough to address persistent high unemployment and slow economic growth.

“Our top policy priority should be job creation, not aggressive deficit reduction that will just prolong our unemployment crisis,” said Bivens. “Lawmakers took aggressive policy action to halt the freefall of the Great Recession, but we took our foot off the accelerator too soon. We have made very little progress in the past two years towards full recovery, and spending cuts coming down the pike might actually throw the economy into reverse.”

The report shows just how far today’s political debate has moved away from what is needed to restore full economic health. Filling in the output gap for 2013 alone would require roughly $650 billion in additional fiscal stimulus, and significantly more in years thereafter to avoid future “fiscal cliffs.” Ignoring these economic realities in favor of overly optimistic forecasts poses a risk of continued unemployment, forgone national income and even bigger long-term budget deficits.