The U.S. in the Post-2008 World Economy

Mark S. LeClair, Fairfield University

April-May 2015

Five Meetings for this Sequence

• Topics:– The 2008-09 Economic Crisis and Recovery (Day 1)– The U.S. and the Changing Global Economy (Day

2)– The Global Monetary System in Flux – the

Changing Role of the Dollar (Day 3)– The Rise of China and the other BRICs (now the

BICs, since Russia not a particularly good place to put money right now!) (Day 4)

If you want copy of slides

• Go to: www.faculty.fairfield.edu/mleclair• Click on link that says:• Lifelong Learning (about 1/3 of the way down

the page)– Must have PowerPoint on computer to retrieve

slides– There is also a link from a talk on April 14th, so

make sure you click the correct presentation

Begin with a Post-Mortem of 2008 Downturn

• Deepest recession since Great Depression– Although 1982 downturn produced similar

problems with unemployment– Crises that originate on financial side tend to be

longer and more intractable.– Foundations of recession:• Poor government policy and poor regulation• CRA and Countrywide

– Housing bubble and misuse of financial instruments

• Problem not necessarily solved.

Economic Crisis Produced Some Fundamental Changes

• While growth returned, labor market has yet to recover– Dropping unemployment rate more a reflection of

falling Labor Force Participation Rate• For those who love numbers, see bls.gov

– Labor demand remains weak 5 years out from the recession

Policy Lessons

• Depth of 2008 recession led to the use of both fiscal and monetary policy tools– Fiscal stimulus passed in January 2009 was too

complex and the pace of spending too slow to affect economy in intended way

– Christina Romer’s math:$878 billion * multiplier of 1.56 = $1.37 Trillion in new

spending = 11.3 million new jobs (@$122,000 per job)….That didn’t happen! (gap was only 5 million jobs)

Monetary Policy

• Federal Reserve flooded economy with liquidity:– QE 1 -> QE 2 -> QE 3 -> The “twist” -……QE?

• Response of economy very slow. Typical of downturns that originate on the financial side of the economy

• Equivalent to printing money, so WHY no inflation (hint: what happened to velocity?) So…….was Bernanke a genius?

Situation Very Stressful for Economists

• Used both policy tools and recovery was very weak.

• Don’t have a third option to try. Exchange rate policy not valid for large economies

• Did learn a lesson that has been repeated many times…..Government policy (Keynsian policy) designed to end a recession must be “fast and furious”

A Picture of the 2008 Recession

Raised Anew the Debate Between Keynsians and their critics

• Does increased government spending really stop a downturn?

• Weak recovery suggests that it may not work that well

Video

• A little entertainment on Keynsian Economics

https://www.youtube.com/watch?v=GTQnarzmTOc

U.S. Growth now Considered “moderate”

• Distressing GDP growth figure from 4th quarter of 2014 – 2.2% growth (source BEA)

• Hope it is an anomaly• Europe remains mired in its own crisis– 2008 recession and the PIIGS– Daily pronouncements that Greece is likely to

default– U.S. should at least be pleased we do not have a

common currency to fret about.

Bureau of Economic Analysis

What is Holding Back U.S. Economy?

• Appreciation of the dollar– Growth in export markets suppressed– Crisis in the European Union makes further

appreciation of the $ likely• Euro now worth roughly $1.08 – was once at $1.50

– Similarly, Japan has devalued its currency – from 88 Yen/$ to 120 Yen/$• Foreign products appear much cheaper, hurting U.S.

exports

Also – Accumulation of Cash

• U.S. businesses are holding on to very large amounts of liquid assets– Instead of investing– Currently $1.64 Trillion (Bloomberg)

• Reflection of what appears to many to be a weak and uncertain economic picture

• Difficult to fix

End of Day One

• Questions and Suggestions for What is covered tomorrow when we examine the global economy