Transcript Perspectives On the Current Recession

Perspectives
on the
Current Economic Recession
World Growth is Reviving
The U.S. Share in the Global Economy Has Held
Roughly at Twenty Percent
In Purchasing Power Terms, the U.S. Still Has the Highest
Level of Per Capita GDP, but Danger Signs Abound
The Good News is that the U.S. is Still One of the Most
Productive Economies in the World
And U.S. inflation rates have remained low, even though
the risk of rising prices is growing
Moreover, while the latest recession has produced substantial
increases in unemployment rates, the U.S. is better off than
many other economies.
The misery index captures the twin measures of inflation and
unemployment, with the U.S. still at the lower end of many
major industrial economies
Now the downside of the U.S. Economy:
While real household incomes have risen since the 1960’s,
most of the increases have been in upper income households.
And Median income has grown the slowest among younger
households in comparison to others. Younger households
face rising child rearing expenses at a time when relative
incomes are growing more slowly.
Slower growth in income among younger households
translates in part to lower household equity, a key determinant
in consumer spending.
If we exclude housing equity, the gap in median net worth by
household age is even greater
Disparities in net worth are under growing pressure as age
dependency ratios rise in major industrialized economies
With lower equity and income, younger households are
experiencing a rising incidence of poverty, whereas older
households have enjoyed a continuing decline.
In the aggregate, changes in income and household wealth are
producing rising levels of inequality in the United States, surpassing
those of the late 1920’s before the onset of the Great Depression.
Economic growth that could reduce poverty and income inequality has been hampered by
mismanagement in the financial sector, with nonperforming loans accounting for rising default rates
on mortgages and other forms of lending. Moreover, current incentives portend a return to the excess
leverage that unfolded in the financial collapse that began in 2008
In the short-run, fiscal policy stimulus often exceeds monetary policy expansion in an effort to offset a
recession. Yet tax receipts that would fund a fiscal stimulus tend to fall as overall GDP either slows in
growth or moves in contraction. All of this generates a regular debate on the optimal size of
government in the economy, and spills over into any given election cycle.
For the United States, not only is the size of overall government in decline. It also is in a reversion to state
and local government displacing the role of the federal government. This pattern has not been seen since
the late 1930’s when the Great Depression was still in force. Thus, nothing on the order of a federal
government “New Deal” or “Great Society” is in the offing as a solution to the current recession.
What, if anything, is the relationship between the size of government and per capita income? If we look
at a 2009 sample of 34 OECD countries, we find that the correlation between taxes and per capita GDP
is weakly positive. That means that there is some positive association between the size of government
and GDP. Yet the weak association suggests that incentives matter greatly as to the kinds of functions
that governments undertake, with some governments doing much to foster economic growth while
others create and prolong economic stagnation.
For the United States, it is clear that the overall size of government has been generally increasing since
the 1920’s, with revenues as a ratio to GDP reaching a peak in the late 1990s. Ironically, this took
place at a time when the U.S. economy was growing at significant rates, whereas the smaller size of
government today has emerged as economic growth has declined. The key here is not that more (or
less) government is the answer to economic growth, but what kinds of government incentives are
needed to produce robust and sustainable growth over time.
If governments engage in deficit spending that does not produce an economic base from which job
creation can unfold, debt levels not only increase but they weigh heavily on liquidity, and ultimately, the
solvency of sovereign governments. Today, Greece is the poster child of an insolvent government, but
the U.S. faces a rising ratio of central government debt to GDP that is unsustainable for the future. Thus
while size matters, more importantly is what kinds of incentives are being applied.
Rising government deficits in the United States could not come at a worse time. When the economy is
in recession, as it has been since 2008, ordinarily the use of deficit-based fiscal stimulus policies
provide a short-term jump start to recovery. However, the U.S. has tried at least two of these programs,
with economic recovery still at anemic levels in comparison to previous recessions.
What the U.S. now faces is a set of difficult fiscal policy adjustments, with the Congressional Deficit
Reduction Committee looking to make over $1.2 trillion in reductions before mandatory formula-driven
reductions take place. The question is whether any of these reductions will result in job-creating
incentives that will revive the housing market, bank lending, and consumer an investment spending at
rates that will bring the U.S unemployment rate back to historical levels while at the same time avoiding
rising inflation. Unfortunately, the level of partisan politics in Washington is not likely to lead to an
informed debate on these choices.