AFTER THE GREAT RECESSIONAFTER THE GREAT RECESSION

Heidi ShierholzEconomist, Economic Policy Institute

April 17th, 2010

National Association of Planning National Association of Planning Councils Councils

2010 National Conference2010 National Conference

FIRST THINGS FIRST, WHERE ARE WE NOW?

Technically, recession is almost surely over

BUT OVER FOR WHOM??

Payroll employment (the number of jobs)

The jobs gap

Layoffs now at pre-recession levels

Source: Bureau of Labor Statistics, Job Openings and Labor Turnover survey

But hiring still incredibly low

Source: Bureau of Labor Statistics, Job Openings and Labor Turnover survey

Unemployment rate

Source: Bureau of Labor Statistics, Current Population Survey

Unemployment for various groups

Gender Race/Ethnicity Education Age

All MaleFemal

eWhite Black Hisp LTHS HS SOMC BA+

16 to 24

25 to 54

55+

Dec 2007 5.0 5.1 4.9 4.4 9.0 6.3 7.8 4.7 3.9 2.1 11.8 4.1 3.2

March2010 9.7 10.7 8.6 8.8 16.5 12.6 14.5 10.8 8.2 4.9 18.8 8.8 6.9

Change 4.7 5.6 3.7 4.4 7.5 6.3 6.7 6.1 4.3 2.8 7.0 4.7 3.7

Underemployment

Long-term unemployment (more than six months)

Job seekers per job opening

THE WORST RECESSION SINCE THE GREAT

DEPRESSION?

ABSOLUTELY

GDP growth in a recession, a comparison

Employment loss in a recession, a comparison

WHAT’S IN STORE?

IMPORTANT – WE DO NOT HAVE TO SETTLE FOR PERMANENTLY HIGH UNEMPLOYMENT!

But, the short- and medium-term are going to be ugly. The recovery in the labor market is going to take a very long time.

Employment growth needed to fill in the gap

• To fill the 11 million jobs-gap by March 2011, we would need to add 1 million jobs every month between now and then.

• To fill it by March ‘12, need 559,000 jobs per month. • To fill it by March ‘13, need 408,000 jobs per month. • To fill it by March ‘14, need 333,000 jobs per month. • To fill it by March ‘15, need 288,000 jobs per month.

Source: Author’s analysis of Current Establishment Survey data.

Unemployment, 2015

Source: Author’s analysis of Bureau of Labor Statistics, Current Population Survey data

Real Middle Income, 2015

Poverty, 2015

WHAT SHOULD BE DONE?

MORE SPENDING FOR JOBS!(Important subtext: ARRA worked,

but wasn’t big enough)

Impact of Recovery Act I

Impact of Recovery Act II

BUT WHAT ABOUT THE DEFICIT?

Perhaps counterintuitive, but true!

A key way to bring the deficit down is to deficit spend

to create jobs

Sources of increase in the budget deficit

Case against deficits in a healthy economy

•In a healthy economy, the private sector is borrowing all the available “loanable funds” to make investments. (Investments are good, because they lead to productivity growth, and productivity growth is what leads to rising living standards.)

•If the government runs big deficits – i.e. also wants to borrow a lot – then it is competing with the private sector for those loanable funds. This competition bids up the price of those funds – i.e. bids up interest rates.

•Higher interest rates lead to less private-sector investment – i.e. government borrowing “crowds out” investment. And that is bad (see above!)

But right now, private borrowing is WAY down

And private savings is way up!

And note: we’re not relying on foreign lending

IN SHORT, RIGHT NOW THERE IS PLENTY OF ROOM FOR

THE GOVERNMENT TO BORROW WITHOUT CAUSING ANYTHING BAD TO HAPPEN!

SO DEFICIT SPENDING IS WHAT WE NEED IN THE SHORT RUN.

BUT WHAT ABOUT THE LONG-RUN? WHAT’S THE ROOT CAUSE

OF OUR LONG-RUN DEFICIT PROBLEMS?

In longer-run, we have a health-care problem, not a social security

problemSpending on Social Security, % of GDP

Spending on Medicare and Medicaid, % of GDP

It’s all about runaway health care costs,

NOT an aging population

For more information

Heidi Shierholzhshierholz@epi.org

202.533.2560

Economic Policy Institute1333 H Street, NW

Suite 300, East TowerWashington, DC 20005-4707

202.775.8810

www.epi.org

EXTRA SLIDES

Public sector controls costs better

The time to worry about foreign lending

has passed…

And the problem was about trade,not budget, deficits

And, trade deficits are driven byover-valued dollar, not fiscal

profligracy

Generational inequity?

Those determined to worry about generational distribution need to focus on trade, not budget deficits

Budget deficit => higher taxes tomorrow, but these higher taxes just get recycled into higher interest payments for bondholders

Trade deficit => excess of imports over exports financed bytransferring ownership of domestic assets to foreign lenders – money spent today that really does get foregone tomorrow

TIME TO REASSESS III:INFLATION

Year over year change in CPI

Too much money chasing too few goods?

Make more goods!

Why is deflation bigger worry?

Increases real burden of a given debt$1,000 mortgage gets more and more burdensome if prices/salaries begin falling

Increases real interest ratesreal interest rate = nominal rate - inflation

Effective federal funds rate

Large debt overhang to work off…

Household loans as % of GDP

Inflation erodes debt overhangs

WHAT DO THE FACTS SAY ABOUT THE LINK BETWEEN

INTEREST RATES AND DEFICITS?

New Treasury issues and long-term interest rates

Rise in deficit a very good thing…

Budget deficit rises by $1.4 trillionbetween 2007 and 2009

And that’s a very good thing!

*Private spending shock greater than theGreat Depression

*Why no Depression? Because this time publicsector muffles, not amplifies, the shock tospending

War on social insurance

A fiscal cancer, massive entitlement programs we can no longer afford, exacerbated by a demographic glitch that began more than 60 years ago

David Walker

Social Security: Still Needed…

Share of income of aged households accounted for by Social Security

And more each year?

More social insurance in the short-run as partial remedy for jobs

crisis?

Unemployment rates by age

Source: Author’s analysis of BLS data.

February 2010

December 2007

March of events…

..Should be fatal to lots of economic nostrums

Time to recognize that key planks of our our decades-long experiment in following a neoliberal macroeconomic strategy has yielded little but inequality and economicfragility.

Shares of GDP accounted for by consumption, investment, net exports,

and government

2009

Corporate sector demand for borrowing

Why aren’t firms investing?Capacity utilization is WAY down

Economic benefit of various stimulus provisions

Source: Mark Zandi, Moody’s Economy.com