Report | Economic Growth

Why is recovery taking so long—and who’s to blame?

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Introduction and key findings

This fall’s presidential campaign will offer conflicting narratives about how the U.S. economy is faring and how well incumbent policymakers have managed the recovery from the Great Recession. But we already know the story. We are enduring one of the slowest economic recoveries in recent history, and the pace can be entirely explained by the fiscal austerity, particularly with regard to spending, imposed by Republican policymakers, members of Congress primarily but also legislators and governors at the state level. Key findings of this brief are:

  • Since the recovery’s trough in June 2009, employment took longer (51 months) to reach its pre-recession peak than in any other of the previous three recoveries. Much of this too-slow march back to the pre-recession employment peak can be attributed to the length and severity of the Great Recession itself—the economy had a much larger hole to dig out of. But the pace of job growth in the recovery phase following the recession was also slow relative to previous recoveries—slower than any on record except the recovery in the early 2000s. At the trough of the Great Recession the economy was more damaged than at the trough of any postwar business cycle; only the 1982 trough was comparable.
  • The ability of conventional monetary policy to spur recovery following the Great Recession was more limited than in any other postwar recovery.
  • Given the degree of damage inflicted by the Great Recession and the restricted ability of monetary policy to aid recovery, historically expansionary fiscal policy was required to return the U.S. economy to full health. But this government spending not only failed to rise fast enough to spur a rapid recovery, it outright contracted, and this policy choice fully explains why the economy is only partially recovered from the Great Recession a full seven years after its official end.

The depth of the Great Recession and the slow pace of recovery

The recession that began in December 2007 and ended in June 2009 was the longest in postwar history. Its cause was the same as that of every other postwar recession—a deficiency of aggregate demand, meaning that the spending of households, businesses, and governments was not sufficient to keep the economy’s resources fully employed. In the case of the Great Recession, the demand shortfall was enormous, and it developed suddenly when the multitrillion-dollar bubble in real estate burst.

Whatever the source of demand shortfall in a recession, the policy remedy is always the same: boost aggregate demand. In terms of monetary policy, this means that the Federal Reserve cuts interest rates to spur borrowing and hence spending. For fiscal policy, this means either a temporary burst of spending by government and/or tax cuts to spur spending by consumers. Some of the temporary burst is automatic and happens without new legislation: Unemployment insurance and food stamps, for example, rise automatically when recessions hit. But sometimes, as with the Economic Stimulus Act of 2008 signed by George W. Bush and the American Recovery and Reinvestment Act (ARRA) of 2009 signed by Barack Obama, the temporary stimulus is legislated.

Taking this argument to its logical conclusion, the sluggishness of the current recovery arises from a prolonged failure to fill the gap between aggregate demand and the economy’s potential output. Figure A shows payroll employment growth following the trough of the most recent four recessions.1 The pre-recession employment peak is shown at the start of each line. The employment recovery from the trough to the pre-recession peak takes successively longer in each new business cycle: 11 months in the early 1980s, 23 months in the early 1990s, 39 months in the early 2000s, and 51 months following the Great Recession.

Figure A

Employment recovery takes successively longer in each new business cycle: Job change since the start of each of the last four recoveries

Month 1981 1990 2001 2007
-18  105.6%
-17 105.7%
-16 103.2% 105.6%
-15 103.1% 105.5%
-14 103.0% 105.4%
-13 102.9% 105.2%
-12 102.7% 105.1%
-11 102.4% 104.9%
-10 102.0% 104.7%
-9 102.0% 104.4%
-8 101.9% 101.2% 101.2% 104.0%
-7 101.5% 101.0% 101.0% 103.4%
-6 101.5% 100.9% 101.0% 102.9%
-5 101.2% 100.7% 100.9% 102.3%
-4 100.8% 100.6% 100.8% 101.8%
-3 100.7% 100.5% 100.7% 101.2%
-2 100.5% 100.4% 100.5% 100.6%
-1 100.1% 100.1% 100.2% 100.4%
100.0% 100.0% 100.0% 100.0%
1 100.0% 99.8% 99.9% 99.7%
2 100.2% 99.7% 99.8% 99.6%
3 100.2% 99.8% 99.7% 99.4%
4 100.3% 99.7% 99.6% 99.3%
5 100.7% 99.8% 99.6% 99.3%
6 101.0% 99.8% 99.6% 99.0%
7 101.4% 99.8% 99.6% 99.1%
8 101.9% 99.7% 99.6% 99.0%
9 101.5% 99.8% 99.5% 99.1%
10 102.8% 99.8% 99.5% 99.3%
11 103.1% 99.8% 99.6% 99.7%
12 103.5% 99.8% 99.6% 99.6%
13 103.9% 100.0% 99.5% 99.6%
14 104.4% 100.1% 99.6% 99.5%
15 104.9% 100.1% 99.4% 99.5%
16 105.2% 100.2% 99.3% 99.7%
17 105.6% 100.3% 99.2% 99.8%
18 106.0% 100.4% 99.2% 99.9%
19 106.4% 100.5% 99.2% 99.9%
20 106.8% 100.7% 99.3% 100.0%
21 107.0% 100.8% 99.2% 100.2%
22 107.4% 101.1% 99.3% 100.5%
23 107.7% 101.4% 99.5% 100.5%
24 108.1% 101.3% 99.5% 100.7%
25 108.2% 101.6% 99.6% 100.8%
26 108.5% 101.8% 99.7% 100.8%
27 108.7% 102.0% 99.7% 101.0%
28 109.1% 102.3% 100.0% 101.2%
29 109.3% 102.4% 100.2% 101.3%
30 109.6% 102.6% 100.4% 101.5%
31 109.8% 102.9% 100.5% 101.7%
32 110.0% 103.2% 100.5% 101.9%
33 110.2% 103.4% 100.6% 102.1%
34 110.4% 103.7% 100.7% 102.1%
35 110.6% 103.9% 101.0% 102.2%
36 110.9% 104.3% 101.0% 102.3%
37 111.1% 104.6% 101.1% 102.4%
38 111.2% 104.9% 101.2% 102.6%
39 111.3% 105.2% 101.4% 102.7%
40 111.4% 105.6% 101.5% 102.8%
41 111.6% 105.8% 101.8% 102.9%
42 111.8% 106.1% 101.9% 103.1%
43 111.7% 106.3% 102.1% 103.2%
44 112.0% 106.7% 102.4% 103.5%
45 112.2% 107.0% 102.5% 103.6%
46 112.6% 107.3% 102.6% 103.7%
47 112.8% 107.5% 102.6% 103.9%
48 113.0% 107.7% 102.9% 104.0%
49 113.2% 107.8% 103.0% 104.1%
50 113.4% 107.8% 103.2% 104.3%
51 113.7% 108.0% 103.5% 104.5%
52 113.9% 108.1% 103.7% 104.6%
53 114.3% 108.4% 103.8% 104.8%
54 114.6% 108.6% 103.8% 104.9%
55 114.8% 108.7% 103.9% 105.0%
56 115.2% 108.9% 104.1% 105.1%
57 115.4% 109.0% 104.2% 105.3%
58 115.6% 109.0% 104.3% 105.6%
59 116.2% 109.4% 104.3% 105.7%
60 116.4% 109.6% 104.5% 106.0%
61 116.8% 109.8% 104.6% 106.1%
62 116.9% 110.0% 104.8% 106.3%
63 117.4% 110.3% 104.9% 106.5%
64 117.7% 110.5% 105.1% 106.7%
65 118.0% 110.7% 105.1% 106.9%
66 118.2% 110.9% 105.2% 107.2%
67 118.6% 111.1% 105.3% 107.3%
68 118.9% 111.4% 105.3% 107.5%
69 119.0% 111.6% 105.2% 107.6%
70 119.4% 111.8% 105.3% 107.8%
71 119.7% 112.1% 105.4% 108.0%
72 120.1% 112.4% 105.5% 108.2%
73 120.4% 112.6% 108.4%
74 120.7% 112.9% 108.5%
75 121.0% 113.1% 108.6%
76 121.2% 113.4% 108.8%
77 121.4% 113.4% 109.0%
78 121.5% 113.8% 109.3%
79 121.7% 114.2% 109.4%
80 121.7% 114.4% 109.6%
81 121.8% 114.7% 109.7%
82 122.1% 115.0% 109.8%
83 122.2% 115.1% 109.8%

 

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Note: The line for each recession begins at the official start of the recession, so the length of the line to the left of zero indicates the length of each recession.

Source: EPI analysis of Bureau of Labor Statistics Current Employment Statistics public data series

S

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Of course, part of the reason that the job recovery took so long following the Great Recession is that so many more jobs were lost. However, even the annual pace of employment growth following the Great Recession’s trough was relatively sluggish; only the recovery following the 2001 recession was slower.2

Policymakers’ response to previous recessions

One key gauge of the severity of recessions is the output gap, which measures the difference between the economy’s actual output and its potential output if all resources (including workers) were fully employed. At the trough of the Great Recession in June 2009, the output gap was 7.1 percent (Table 1), equivalent to over a trillion dollars. The only larger output gap in the postwar period was the 7.6 percent gap recorded at the trough of the early 1980s recession in the last quarter of 1982. Cumulatively, the losses over the Great Recession and the sluggish recovery dwarf even those from the early 1980s recession. The output gaps at the trough of the early 1990s recession (the first quarter of 1991) and that of the early 2000s (the final quarter of 2001) were 2.6 and 1.8 percent, respectively.

Table 1

Measures of economic performance for the last four recessionary troughs

Recession’s trough Output gap (% of potential GDP) Cumulative output gap (% of potential GDP) Federal Funds Rate Year-over-year inflation rate (PCE)
1982Q4 -7.6% -51.9% 9.3% 5.9%
1991Q1 -2.6% -56.1% 7.3% 3.8%
2001Q4 -1.8% -29.5% 2.1% 1.8%
2009Q2 -7.1% -133.5% 0.2% 1.2%

Note: Data on growth in government spending over first 27 quarters of recovery is author’s analysis of data described in Figure B.

Source: EPI analysis of data from Tables 1.1.4, 3.1, and 3.9.4 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA); data on output gap from Congressional Budget Office (2016); data on federal funds rate and yearly change in core PCE deflator from St. Louis FRED database

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It is possible to infer from the size of the output gap at a recession’s trough how much policy assistance is needed to push the economy back to full recovery. The recession of the early 1980s and the Great Recession are similar in this regard. Traditionally, the quickest policy response to recessions is provided by the Federal Reserve, which uses monetary policy to reduce short-term interest rates. But there was much more scope for this type of conventional monetary policy to aid recovery in the early 1980s than in the Great Recession. At the trough of the 1980s recession, the federal funds rate (the key short-term interest rate controlled by the Fed) was over 9 percent. It was just 0.18 percent at the trough of the Great Recession.3 Generally, there is a zero-bound on how low the federal funds rate can be pushed. This means that there was much more room to move down the federal funds rate following the 1982 trough when compared to the 2009 trough. Further, the output gaps were substantially smaller at the troughs of the early 1990s and early 2000s recessions, and so monetary policy did not have to work as hard to return the economy to full employment.

Another variable influencing the scope for monetary policy is the inflationary momentum coming out of a recession. Because consumption and investment decisions are made on the basis of real interest rates (interest rates adjusted for inflation), and because higher rates of inflation reduce (all else equal) these real interest rates, exiting a recession when inflation rates are higher gives more scope for cutting real interest rates and boosting the economy. At the 1982 trough, core inflation (inflation rates excluding volatile energy and food prices) had been 5.9 percent over the previous year; at the 2009 trough, core inflation had been just 1.2 percent. Again, there was much more scope for monetary policy to boost growth following the 1982 recession than when we began exiting the Great Recession. And again, even following the much-milder recessions of the early 1990s and early 2000s there was more scope for monetary policy on this front as well: Core inflation was 3.8 percent in the year ending in the 1991 trough and was 1.8 percent in the year ending in the 2001 trough.

In sum, after the Great Recession the economy was more damaged than it had been after any other recession in postwar history, and low interest rates and low inflation meant that conventional monetary policy had much less scope than in the past to aid recovery. The implication for fiscal policy should have been clear.

The cause of slow growth following the Great Recession

The most direct way for policymakers to fill the aggregate-demand gap that is underlying a recession is through public spending. But public spending following the recession’s trough in 2009 has been historically slow relative to other business cycles, even though the ability of monetary policy has been constricted.4

Figure B shows the growth in per capita spending by federal, state, and local governments following the troughs of the four recessions. Astoundingly, per capita government spending in the first quarter of 2016—27 quarters into the recovery—was nearly 3.5 percent lower than it was at the trough of the Great Recession. By contrast, 27 quarters into the early 1990s recovery, per capita government spending was 3 percent higher than at the trough, 23 quarters following the early 2000s recession (a shorter recovery) it was 10 percent higher, and 27 quarters into the early 1980s recovery it was 17 percent higher.

Figure B

Fiscal austerity explains why recovery has been so long in coming: Change in per capita government spending over last four business cycles

1982Q4 1991Q1 2001Q4 2009Q2
-6 90.83817
-5 96.46779 91.33168
-4 96.72548 97.80345
-3 96.51523 96.35624 94.05089
-2 97.21731 98.09825 98.14218 94.4813
-1 98.26435 98.92533 97.98324 96.68474
100 100 100 100
1 100.3829 100.7468 101.5275 99.84022
2 100.9558 100.4456 102.3723 99.50632
3 101.005 100.9653 102.8023 100.7222
4 99.79553 102.3054 103.3013 101.0192
5 100.4771 102.4831 103.1351 101.1242
6 101.715 102.7714 104.3665 100.3432
7 102.037 102.2554 104.5556 98.88213
8 103.485 101.9195 104.6451 98.15822
9 104.602 101.724 105.4192 97.23836
10 106.0107 102.011 105.8382 96.86414
11 107.6073 101.868 105.804 95.9267
12 107.6288 101.2959 105.4445 95.78736
13 108.7749 101.4328 106.1767 95.40735
14 110.4932 102.1325 106.3521 94.83589
15 112.3029 101.9209 106.5289 94.21625
16 111.6476 102.6275 106.0185 93.90439
17 112.0741 102.8173 107.5423 93.62299
18 112.6221 102.3836 107.6773 93.04895
19 112.3952 101.1486  107.8776 93.22292
20 113.0807 101.9359 108.2144 93.60604
21 113.3476 103.2437 109.1187  94.245
22 113.3408 102.7047 109.0787 94.14226
23 113.108  102.7598 109.5846 95.09063
24 114.405 103.1194 109.8789 95.43504
25 114.9973 103.4402 95.722
26 116.1049 103.3562 95.86387
27 116.8758 103.2392 96.35498

 

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Note: For total government spending, government consumption and investment expenditures deflated with the NIPA price deflator. Government transfer payments deflated with the price deflator for personal consumption expenditures. This figure includes state and local government spending.

Source: EPI analysis of data from Tables 1.1.4, 3.1, and 3.9.4 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA)

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If government spending following the Great Recession’s end tracked spending that followed the recession of the early 1980s for the first 27 quarters, governments in 2015 would have been spending an additional trillion dollars in that year alone, translating into several years of full employment even had the Federal Reserve raised interest rates. In short, the failure to respond to the Great Recession the way we responded to the other postwar recession of similar magnitude entirely explains why the U.S. economy is not fully recovered seven years after the Great Recession ended.

Who is to blame for the post–Great Recession austerity?

Federal spending growth following the Great Recession is clearly slower than it was following the early 1980s and early 2000s recessions but on par with spending growth following the early 1990s recession. At the state and local level, slow growth of public spending is even more pronounced, and state and local policymakers deserve blame for adopting austere spending policies, such as the decision, by 19 states, to refuse free fiscal stimulus from the Medicaid expansion under the Affordable Care Act.

However, even despite the fact that most of the slow growth in total spending during this recovery can be accounted for by state and local spending trends, the lion’s share of the blame for fiscal austerity during the recovery should still accrue to Republican members of Congress in Washington, D.C. The reason for this is simple: State and local policymakers face spending constraints that do not apply to federal policymakers. Most specifically, these state and local policymakers by and large have to balance the operating portions of their budgets by law. They can admittedly borrow to finance long-run infrastructure projects, but have been unwilling to do so (as is documented by McNichol (2016)). But even besides the legal strictures against running operating deficits (a stricture not constraining federal action), states also face real economic constraints to undertaking fiscal stimulus. To put it most simply, states do not print their own currency. This means that they really do have to be more cautious about running up debt that sometimes erratic financial markets can decide (rightly or wrongly) is unsustainable. In short, states do need to at least keep one eye on the “bond vigilantes” in financial markets that can appear to punish entities that are perceived to be too profligate.

The federal government, on the other hand, is free to run deficits, and, because it can print its own currency, bond vigilantes cannot spark a self-fulfilling financial crisis. Further, even during normal times, transfers from the federal government to states account for more than 20 percent of total state and local resources for spending, and there is no reason that federal aid to states could not have been more forthcoming.

Even the timing of austerity over the current recovery is fairly easy to pinpoint in actions undertaken by Republicans in Congress. The Obama administration championed and signed the ARRA during the recession in early 2009, and the law led to a sharp uptick in government spending that persisted throughout the early stages of the recovery.5 Through the end of 2010 (when the ARRA had mostly petered out), total government spending per capita was not that different than in previous recoveries (and actually rose more rapidly than in previous cycles during the recession phase). But in 2011 Republicans in the House of Representatives demanded spending cuts as a precondition for raising the debt ceiling, a vote that had historically been pro-forma (the ceiling has been raised 78 times just since 1962). The resulting Budget Control Act of 2011 has significantly reduced the growth of discretionary spending. Both in word and deed, Republican lawmakers have embraced and enforced fiscal austerity, and the result has been the most discouraging recovery on record.

Conclusion

The recovery since 2009 has been historically slow, and the disappointing pace can be explained entirely by the fiscal austerity imposed by Republicans in Congress.

Of course, other national policymakers are not completely blameless. While the Federal Reserve pushed beyond the bounds of conventional monetary policy to fight the recession and aid recovery, there are reasons to think that it could have done more. The Obama administration issued several calls for more expansionary fiscal policy (like the American Jobs Act of 2010), but it had no unilateral power to pass more expansionary policy. Yet it could have made a louder and more consistent case that the slow recovery had concrete, identifiable roots in decisions made by Congress. Had the Obama administration made such a powerful case for why austerity was hampering growth, it could have educated the public and potentially helped build support for more sensible policy the next time the United States faces a recession.

But these caveats about the Fed and the Obama administration are mostly quibbling. By far the biggest drag on growth throughout the recovery from the Great Recession has been the fiscal policy forced upon us by Republican lawmakers in Congress and austerity-minded state legislatures and governors.

Data appendix

Figure B shows total government spending—consumption and investment spending plus transfers to persons—for federal, state, and local governments at similar points during the last four recoveries. This appendix breaks the spending down into those components to show that the pattern is robust among them.

Appendix Figure A1 uses data found in the gross domestic product data from the National Income and Product Accounts to examine government consumption and investment spending alone. It excludes government transfers to persons—items like unemployment insurance, food stamps, Social Security, and Medicare. (Given that these transfers constitute a majority of government spending, as well as a large source of traditional antirecessionary spending, it seems important to us to include them in the analysis.) We use the real measures for government spending and investment provided by the NIPA data and deflate nominal figures on transfer payments by the price index for personal consumption expenditures (PCE deflator) to get the real value for these transfers.

Appendix Figure A1

Change in per capita government consumption and investment spending over last four business cycles

1982Q4 1991Q1 2001Q4 2009Q2
-6 96.22013
-5 97.35412 96.4078
-4 98.19346 96.94564
-3 97.88316 97.45857 98.04831
-2 98.3047 99.26298 99.14412 98.45942
-1 98.67161 99.81994 98.81572 98.40973
100 100 100 100
1 100.7543 100.0348 101.2568 100.3176
2 101.5597 99.3115 102.0003 99.88732
3 102.9729 98.5962 102.5302 98.96456
4 101.0121 99.06937 103.0105 99.48441
5 101.9984 98.61256 102.4635 99.19643
6 104.0735 98.75675 103.8451 97.96847
7 104.6779 98.20296 103.5878 95.91128
8 106.419 96.80364 103.9043 95.64245
9 107.4992 96.61834 103.9852 94.84424
10 109.7682 96.49372 104.3529 94.28518
11 112.0602 96.39418 104.4912 93.66624
12 112.1478 94.94786 103.7728 93.05598
13 112.8592 95.22395 103.7701 92.60009
14 114.9151 96.51237 103.727 91.51488
15 117.2462 95.34936 104.2722 90.32311
16 116.2836 95.28991 103.6337 89.71188
17 116.7919 95.51678 104.2403 89.02723
18 117.6042 94.95055 104.3929 88.22764
19 117.5862 93.8081 104.3526 88.07341
20 118.721 93.77102 104.7627 88.16989
21 117.6832 95.00266 104.3025 88.37758
22 117.8578 94.79418 104.9454 87.87398
23 117.6349 95.18333 105.4325 87.70926
24 119.5474 94.90888 105.5871 88.12076
25 118.7671 95.62113 88.32981
26 120.4393 95.45941 88.17269
27 121.1134 95.30317 88.27584

 

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Note: Includes state and local government spending.

Source: EPI analysis of data from Table 1.1.3 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA)

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A growing share of these transfer payments is going to purchase health care for households. Given that health care prices have tended to grow more rapidly than overall prices, we separated the transfers into health- and non-health-related spending and deflated them separately with the health-care-specific PCE deflator as well as a non-health-care PCE deflator. This had little effect on overall trends or the overall characterization of public spending growth in the current recovery relative to previous ones, as can be seen in Appendix Figure A2.

Appendix Figure A2

Change in per capita total government spending over last four business cycles, with health transfers deflated separately

1982Q4 1991Q1 2001Q4 2009Q2
-6 90.20869
-5 96.23667 90.74637
-4 96.56057 98.00138
-3 96.35597 96.37705 94.42992
-2 97.03058 97.93598 98.23849 94.37587
-1 98.23598 98.94672 98.01772 96.5502
0   100 100 100 100
1 100.3276 100.763 101.507 99.93608
2 100.9205 100.5103 102.4891 99.75142
3 101.0866 101.1234 102.9483 101.0937
4 99.83402 102.5163 103.4663 101.1459
5 100.582 102.7697 103.4312 101.1227
6 101.8492 103.1087 104.4829 100.3236
7 102.1503 102.6591 104.7174 98.9505
8 103.5412 102.3939 104.7423 98.44243
9 104.7754 102.2767 105.6383 97.54489
10 106.2842 102.5831 106.0635 97.13136
11 107.974 102.486 105.979 96.22713
12 108.0619 101.9205 105.6772 96.0962
13 109.3037 102.0822 106.3825 95.71209
14 110.761 102.846 106.5796 95.25204
15 112.499 102.6784 106.9256 94.66233
16 111.8057 103.4303 106.4801 94.26357
17 112.2982 103.6335 107.9919 94.03285
18 112.8452 103.1603 108.2044 93.47318
19 112.6132 101.8837 108.4758 93.68899
20 113.2749 102.7313 108.4953 94.08936
21 113.5246 104.1359 109.6243 94.75358
22 113.5514 103.5772 109.5517 94.67385
23 113.3992 103.7064 109.9683 95.68667
24 114.7006 104.1049 110.3685 96.02822
25 115.3821 104.4465 96.32024
26 116.5838 104.4057 96.47906
27 117.2197 104.35 96.93837
ChartData Download data

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Note: For total government spending, government consumption and investment expenditures deflated with the NIPA price deflator. Government transfer payments deflated with price deflators for personal consumption expenditures. Health-related transfers deflated with the health-care-specific PCE deflator and all other transfers with the overall PCE deflator minus health expenditures.

Source: EPI analysis of data from Tables 1.1.4, 3.1, and 3.9.4 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA)

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Finally, we show the same calculation for just federal spending in Appendix Figure A3. While a large gap between spending in the current recovery relative to the early 1980s and early 2000s recovery remains, the early 1990s recovery looks almost as austere as the current one. There are a couple of things to note about this, however. First, 27 quarters into the 1990s recovery the Federal Reserve had already raised short-term interest rates to over 5.5 percent. Today, 27 quarters into the current recovery, these rates stand at 0.3 percent. Policymakers seemed to see much more momentum at this point in the 1990s recovery, and their perception seems well-founded if one compares data on growth in per capita GDP since each recovery’s trough: Annualized growth in the first 27 quarters of the early 1990s recovery was 3.6 percent, compared to 1.3 percent in the current recovery. All of this makes it clear that the current recovery needs more policy help in a more pressing way than the early 1990s recovery did.

Appendix Figure A3

Change in per capita federal government spending over last four business cycles, with health transfers deflated separately

1982Q4 1991Q1 2001Q4 2009Q2
-6 84.95639
-5 93.84643 86.21461
-4 94.10169 97.97184
-3 94.01117 96.43198 91.02889
-2 95.0068 97.5508 97.69773 91.7159
-1 97.127 98.07295 98.94139 94.71365
0   100 100 100 100
1 100.2109 100.5253 102.6696 99.61307
2 101.6036 99.33519 104.6901 99.70174
3 101.2574 98.88762 105.1451 102.9741
4 99.09584 101.1138 105.8428 103.6595
5 99.45415 101.3093 106.2712 103.8551
6 100.9012 101.6847 109.466 103.2215
7 100.388 101.2586 109.1528 101.5433
8 102.3364 100.4093 110.2571 101.1731
9 103.4068 99.71754 111.1642 100.3992
10 104.6638 99.36693 111.5333 99.99504
11 106.4057 99.02338 112.3693 98.92747
12 105.9062 97.76421 111.9305 98.38948
13 106.5392 97.46035 113.4088 98.30147
14 108.8137 98.30162 113.4333 97.5675
15 111.4394 97.02465 114.2533 96.86845
16 110.0376 97.72213 113.3999 96.06542
17 110.4973 97.79474 117.9778 95.36982
18 111.4113 97.27566 117.7896 94.56722
19 110.8376 95.74894 117.5504 94.67549
20 111.1152 97.05547 118.4924 94.90054
21 110.7038 97.7321 118.7748 95.19415
22 109.6982 96.88852 119.6706 94.90063
23 109.0015 96.39022 120.7981 96.24785
24 110.4152 96.25948 121.0375 96.33343
25 110.8697 97.03147 96.31796
26 111.9594 96.59895 96.73689
27 112.4552 96.09173 97.16861

 

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Note: For total government spending, government consumption and investment expenditures deflated with the NIPA price deflator. Government transfer payments deflated with price deflators for personal consumption expenditures. Health-related transfers deflated with the health-care-specific PCE deflator and all other transfers with the overall PCE deflator minus health expenditures. This figure does not include state and local spending.

Source: EPI analysis of data from Tables 1.1.4, 3.1, and 3.9.4 from the National Income and Product Accounts (NIPA) of the Bureau of Economic Analysis (BEA)

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Second, the apparent austerity of the early 1990s was driven by defense spending, which fell from 6.9 percent of GDP in 1989 to just 4.0 percent in 1998. The defense spending decline in recent years is substantially smaller; it fell from 4.7 percent in 2007 to 4.1 percent in 2015. If defense spending has smaller multiplier effects (particularly on domestic employment), then the early 1990s austerity might have dragged on growth less than the overall data might lead one to believe.

Endnotes

1. The main reason we restrict attention to the last four business cycles is ease of comparability. Business cycles before the 1980s tended to be shorter and more frequent, whereas the post-1980s cycles all lasted nearly as long as the current recovery. Also, the 1981 recovery proxies well for all previous cycles in terms of GDP growth and growth in public spending, so it provides a convenient stand-in.

2. The contention that the severity of the recession makes recovery to a pre-recession peak take longer can perhaps be better addressed by indexing employment levels to the previous business-cycle peak rather than to the recession’s trough. We index here to the trough because the issue this paper aims to address is how well policymakers have managed the recovery from the Great Recession. Nobody would argue that the Obama administration was responsible for the Great Recession; it started more than a year before Obama took office. But the administration can be held to account for its response. In any case, Figure A displays the trajectory of employment losses before the recession’s trough, and so the recession’s severity remains fully visible.

3. The Fed cut the federal funds rate sharply relative to its pre-recession levels during the recessionary phase of all postwar business cycles. The focus on its value at the trough of the recession is to point out that conventional monetary policy had much less scope to boost the underlying pace of recovery.

4. This brief highlights austerity on the spending side. In theory, fiscal stimulus could be provided through tax cuts rather than spending. But to overturn our assessment of the effect of stimulus provided in the current recovery versus previous ones, it would have to be the case that there were much larger tax cuts since 2009 than in previous recoveries. This is not the case. A payroll tax holiday was enacted for 2011 and 2012, but income taxes rose substantially in 2013 as the high-income tax cuts passed in 2001 and 2003 expired. More importantly, recovery from the recessions of the early 1980s and early 2000s was accompanied by historically large cuts in income taxes signed into law by the Reagan and George W. Bush administrations. The recovery following the early 1990s recession was accompanied by substantial tax increases overall, so it could be the case that accounting for taxes makes the current recovery look better in terms of fiscal stimulus provided relative to that one. But including taxes would also widen the gap between the fiscal stimulus provided in the current recovery and the stimulus provided in the early 1980s and early 2000s recoveries.

5. It is worth noting that the single largest quarterly spike in government spending happened under George W. Bush. The Economic Stimulus Act of 2008 led to a $100 billion increase in government transfers in a single quarter in that year. While often characterized as a tax cut, most of the act’s stimulus shows up in national income and product accounts data as a federal government transfer.

References

Bureau of Economic Analysis (BEA). National Income and Product Accounts interactive data. http://bea.gov/iTable/index_nipa.cfm.

McNichol, Elizabeth. 2016. “It’s Time for States to Invest in Infrastructure.” Policy Futures Report. Center for Budget and Policy Priorities.