Econobytes-Friday, September 27, 2013

Today, what if we had responded to the Great Recession as we have to previous recessions?

Friday, September 27, 2013

Earlier this week, we ran a piece by economist Josh Bivens of the Economic Policy Institute with a graph showing just how austere public spending has been in the last 5 years relative to historical episodes of recession and recovery (below). In today’s edition, more from Bivens on the gap in financial support and what it will take to boost the economy back to full employment:

fisc blog
Click image for interactive version.

There is an enormous difference between today’s level of public spending and what would have prevailed had the normal historical experience following recessions held. Had we tracked this normal historical experience, we would have about $800 billion more public spending and the economy would be essentially back to pre-recession health.

What does the arithmetic and economics say would be needed to push the economy back to full-employment?

  • The answer is very close to what’s implied above: you’d need something well north of $600 billion to get close (assuming a high multiplier—about the full $800 billion with a low multiplier).
  • This is a startling number of course. The original American Recovery and Reinvestment Act (ARRA), rightly labeled the single-largest discretionary fiscal policy stabilization effort in U.S. history, was smaller than this—boosting demand by about $300-400 billion each year for two years  (through both tax cuts and spending increases).

Could it possibly be right that the economy could really need an even bigger boost five years after the Great Recession started, and even after all that demand generated by the ARRA?

  • Yes: the output gap (the difference between actual GDP and what could be produced if deficient aggregate demand was not suppressing GDP) remained at just under $900 billion even at the end of 2012, and had essentially been stuck there for two years.
  • The difference between today’s level of public spending and what it would be if we just followed the normal trajectory following recessions is the equivalent of another Recovery Act spent in a single year.

This means that a call for such large-scale fiscal support isn’t radical— it is the standard, historical response that has led to recovery.

  • On the other hand, the actual course we have taken over the past five years should be considered radically deficient by historical standards.
  • Significantly higher financial support would have pushed the level of public spending to where it should be if it followed historic norms.
  • The actual path of public spending we’ve taken has pushed it to outlier status.

Special thanks to Josh Bivens and EPI for today’s EconoBytes.

EconoBytes: What Progressive Economists and Policy Experts are Saying Today
EconoBytes is a quick daily economic roundup for journalists, sponsored by the Roosevelt Institute and compiled by Fenton Communications. We bring together blogs, analyses, and studies by progressive economists, policy experts, and think tanks on the most pressing issues in the current public economic debate.

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