Monday, October 25, 2010

The Bush/Republican Great Depression

Here's a very nice paper by Dean Baker published by the Center for Economic and Policy Research. I've pulled out a few bits that I find most informative:
CBO also calculates that the gap between potential GDP and actual GDP will be $730 billion in 2010. This is equal to almost $2,400 in wasted output per person. By 2014, when CBO projects that the economy will again be close to normal levels of unemployment, the economy is projected to have lost a total of $3.4 trillion in output due to the downturn, more than $11,000 per person, as shown in Figures 1a and 1b. Losses of this magnitude swamp the damage done by even the worst policy mistakes of the last half-century. The losses from the recession also vastly exceed the cost of any of the government programs that have proven controversial in recent years, as shown in Figure 2.
Think about this. The Republicans are raising a big stink about "Obamacare" and "the Obama stimulus". But these programs are tiny compared to the economic losses cuased by the Republican "deregulate, deregulate, deregulate" ideological fanaticism under Bush.

The loss of $11,000 of production by unemployment is a huge loss to a society. It is money that can't be recouped in any obvious way because you can't reach back into the past and put people to work. The nearly 10 million "officially" unemployed or 18 million who are forced out of the work force or under-employed are a loss because they become a burden on family, friends, and social services. The bankers and right wing ideologues are against "stimulus" which would put these people back to work. They think that unemployment will "discipline labour" and teach others to be more "economically prudent". But in reality, the very class of people who precipitated the economic disaster -- the Wall Street banks, the hedge fund managers, and other big money men -- have all been rewarded through TARP (a George Bush bill passed in 2008, necessary for the economy, but which rewarded the miscreants who created the problem in order to save the rest of us from complete economic collapse) and by Federal Reserve policies and on-going programs by Obama.

Dean Baker addresses the inequity of the pain suffered by this worst economic downturn in 80 years:
The situation is made even worse by the fact that these losses are not evenly shared. High rates of unemployment create anxiety among tens of millions of employed but vulnerable workers. They also put downward pressure on the wages of workers who most fear unemployment, which are disproportionately workers without college degrees. However, the unemployed and under-employed bear the bulk of the loss that results from the economy operating far below its potential level of output. These workers have, by far, seen the sharpest decline in income and are in the most precarious financial situation. They have suffered the greatest losses from the Great Recession.

By contrast, corporate profits have completely recovered from the downturn. In the 2nd quarter of 2010, the broadest measure of corporate profits, net operating surplus, stood at $1,570 billion. This is $104 billion, or more than 7.0 percent, above the pre-recession peak reached in the 2nd quarter of 2007, as shown in Figure 3. The recovery of profits suggests that corporations, or more specifically their major shareholders and top executives, are no longer feeling the pain of the downturn.
Here's Baker's attack on those who would "fix" the problem by austerity measures. He points out that is an "indirect" technique. Whereas stimulus spending is a "direct" technique:
Proponents of fiscal stimulus see the direct effects of the stimulus as fostering growth. Government spending, for example on infrastructure or education, directly employs people and also provides paychecks that will mostly be spent by the workers hired, creating additional demand and employment. Transfer payments like unemployment benefits or tax cuts also put money into people’s pockets, much of which will typically be spent, thereby creating demand and jobs.

By contrast, advocates of fiscal adjustment, in the form of higher taxes and/or lower government spending, rely on the indirect effect of these policies to increase growth. The argument is that fiscal adjustment will reduce the government’s demand on the economy’s resources, thereby allowing the private sector to make better use of these resources. In principle, this shift to private sector spending comes about through lower interest rates, which both fosters domestic investment and leads to a lower-valued currency that supports improvements in the trade balance.
Relying on these indirect measures is quite uncertain. By definition a recessionary time is a time of slack demand and with Fed rates at zero percent, there is no stimulus to come from monetary policy. For a country like the US with a relatively small part of the economy involved in international trade, the benefits of a lower valued dollar are consequently small. The reality is that during a Great Recession, government spending does not "crowd out" private spending because there is little or no private spending. The very point of government stimulus is to make up the shortfall in spending because of retrenchment in the private side of the economy.

Here is Dean Baker's conclusion:
There has been a considerable effort to tout the merits of fiscal austerity as a route to restoring growth. This argument has been put forward in direct opposition to arguments for increased stimulus for boosting the economy. While there may be a case that lower deficits can foster growth under some circumstances, the evidence presented in the Broadbent and Daly paper does not suggest that a movement toward lower deficits in the current economic situation in the United States would be expansionary.


Finally, all the countries that successfully used austerity to boost growth had much higher interest rates than the United States does at present. This meant that there was substantial room for rates to decline following the imposition of austerity.

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