Transcript still the word du jour - Thomas R. Brown Foundations

Professor Emeritus of Economics
Thomas R. Brown Professor in
Economics Education
U.S. ECONOMY—
BETWEEN A ROCK AND A HARD PLACE
THE “GREAT RECESSION”
HAS BEEN OVER FOR MORE
THAN TWO YEARS!
OFFICIALLY ENDED JUNE 2009
TODAY
A WORLD WITH MUCH ANGST!
ANGST - STILL THE WORD DU JOUR
 December
2007 start of the recession
Unemployment 5.0%
 September 2011 9.1%
 Total unemployment 16.4%
 Currently
over 14 million unemployed
 6 million have been unemployed for six
months = post WWII record
 Discouraged workers = 6.4 million
Sept, 2011 Sept, 2010
 Less than H.S.
13.3%
15.0%
 H.S. no college
9.7%
10.8%
 Some college
9.0%
8.6%
 College Grad
5.0%
4.8%
Participation rate =
% population over age of 16 in labor force
September 2011 64.0%
January 2001
67.2%
Employment rate =
% of population over the age of 16 employed
September 2011 58.2%
January 2001
64.4%
MORE WORKING THAN MEN
MORE IN THE LABOR FORCE THAN MEN
MORE HIGH SCHOOL GRADUATES THAN MEN
MORE IN COLLEGE THAN MEN
MORE SEEK ADVANCED DEGREES THAN MEN
CPI Annual Rate
September = 3.8%
GREAT RECESSION
HOW BAD WAS IT?
18 months
Longest recession since the Great Depression
UNDERPERFORMING
2009 GDP
2010 GDP
2011 GDP
Q1 -6.4%
Q2 -0.7%
Q3 1.6%
Q4 5.0%
Q1 3.7%
Q2 1.7%
Q3 2.5%
Q4 2.3%
Q1 0.4%
Q2 1.3%
Too slow to lower
unemployment rate
Growth at the end of previous longest recession
1982
4th Q 0.3%
1983
1st Q 3.3%
2nd Q 9.3%
3rd Q 8.1%
4th Q 8.5%
1984
1st Q 8.0%
2nd Q7.1%
AGGREGATE DEMAND = AD
AD = C + I + G + X
C = CONSUMER SPENDING
I = INVESTMENT SPENDING
G = GOVERNMENT SPENDING
X = NET EXPORTS (EXPORTS-IMPORTS)
HIGH UNEMPLOYMENT
Fiscal Policy
Increase government spending
Decrease taxes
Run a budget deficit
Monetary Policy
Lower federal funds rate
Lower reserve requirements
Buy bonds in the open market
Increase banks’ excess reserves
UNSUSTAINABLE
Deficit
 Fiscal 2009
$1.4 Trillion
 Fiscal 2010
$1.3 Trillion
 Projected 2011 $1.3 Trillion
 Projected
2012 $973 billion
ADDICTED TO DEFICITS
Total national debt = $14.8
 Debt
Trillion
held by foreign govts. $4.3 Trillion
 Debt held by U.S. citizens
$5.6 Trillion
 Debt held by trust funds
$4.8 Trillion
 Debt
 Two
ceiling – Hit May 16, 2011
temporary increases
Since 1962 the US has reached the debt ceiling
76 times
4 times we did not immediately raise the
ceiling—but we always eventually did
THIS YEAR THE NATIONAL DEBT HAS BEEN
INCREASING AT AN AVERAGE OF
$4.3 BILLION/DAY
Fiscal Year 2011
Record high interest payment on the debt
$434 billion
With record low interest rates!
Government spending
Record high post WWII percentage of GDP
25.3%
Post WWII average 20.4%
FEDERAL TAX COLLECTIONS
Record low post WWII percentage of GDP
14.4%
Post WWII average 18.5%
For all practical purposes …
Fiscal policy is dead!
KEYNESIAN POLICY HAS PLAYED OUT
ADOPTED AS A POLICY TOOL IN 1946
TAX REBATES
STIMULUS PACKAGES
AUTO BAILOUT
CASH FOR CLUNKERS
FIRST TIME HOME BUYER TAX CREDIT
NEW APPLIANCE TAX CREDIT
CUTS IN THE PAYROLL TAX
EXTENDED UNEMPLOYMENT BENEFITS
AND MORE
State and local governments continue to
downsize
Private sector is doing a little hiring
Government sector letting people go
Since 2008
States have cut 98,000 jobs
Local governments have cut 409,000 jobs
37%
of federal government spending is
currently being financed by borrowing
Unsustainable!
 Mandatory
 1965
 2011
 Add
spending
29% of budget
66% of budget
defense
83% of budget
17% discretionary
“EVERYBODY WANTS TO GO TO HEAVEN, BUT
NOBODY WANTS TO DIE”


2010 Social Security and Medicare Trustee’s Report

Medicare unfunded liability
$89 Trillion

Social Security unfunded liability
$18 Trillion
Total unfunded liability
$107 Trillion
THIS IS WHERE THE MONEY IS!
Solution! First try—
National Commission on Fiscal
Responsibility and Reform
“The Moment of Truth”
 Make
America better off than it is today
 Don’t disrupt fragile economic recovery
 Cut red tape and unproductive government
spending
 Protect the truly disadvantaged
 Cut spending we can’t afford
 Demand productivity and effectiveness from
Washington
 Simplify and reform tax code
 Don’t make promises we can’t keep
New super committee
6
Democrats
 6 Republicans
 Charge—Reduce
 Maybe
deficit by $1.5 trillion
$2 trillion with jobs bill
UNTRUSTWORTHY
RECENT POLL
81% SAID THEY TRUSTED GOVERNMENT
TO DO WHAT IS RIGHT SOME OF THE
TIME
OR
NEVER!
12% of voters approve of Congress
We cannot grow ourselves out of this
deficit.
It is a structural deficit
The problem is real and the solution
will be painful.
 Hyper

expansionary monetary policy
The Federal Reserve’s balance sheet has exploded!
June 2007
 September 2011

$ 869 Billion
$2.82 Trillion
Where did the Fed get the money to
buy APPROX.$2 trillion assets?
Is the Fed’s monetary policy gun out
of bullets?
Where is the money multiplier?
ZERO
INTEREST RATES FOR 33 MONTHS
INJECTED APPROX. $2 TRILLION IN
EXCESS RESERVES
QE 1 QE 2
WHAT NEXT?
OPERATION TWIST
STOP PAYING INTEREST ON BANK RESERVES
PRINT MORE MONEY
The recession will not be viewed as really over
until the—
“UNEMPLOYED FAT LADY SINGS”
NO CONCERTS CURRENTLY SCHEDULED
UNCERTAINTY IS PARALYZING
THE ECONOMY!
WE MUST FOCUS ON LONG-RUN
SOLUTIONS
NOT
ELECTION CYCLE SOLUTIONS
WE MUST BE PATIENT
WE MUST FIRST DO NO HARM
WE MUST BE THANKFUL FOR WHAT WE HAVE