Worst Recovery in Post-war Era Largely Explained by Cuts in Government Spending
Senior Economist and Director of Trade and Manufacturing Policy Research, Economic Policy Institute
In a story in the Wall Street Journal last Friday, reporter Eric Morath notes that the recovery from the Great Recession has been historically slow. “In terms of average annual growth,” he writes, “the pace of this expansion has been by far the weakest of any since 1949.” Missing from this story is the fact that our historically weak recovery has been accompanied by historically deep cuts in government spending. The figure below compares the strength of expansion for each recovery since 1949 with changes in government spending (it includes data on the strength of each expansion, as reported by Morath). You can see that almost every other recovery was accompanied by an increase in federal, state, and local government spending.
During a recession, changes in government spending have a “multiplier effect” on output and income: each dollar of additional spending increases—and each dollar cut spending decreases—GDP by much more than one dollar. The Great Recession of 2008-2009 was the worst on record since the Great Depression of the 1930s, in terms of both total decline in real GDP, and total increase in the unemployment rate between the previous peak and the beginning of the subsequent recovery. The economy was in a very deep hole in 2009, and had we spent the way we did after previous recessions, we would have experienced substantial increase in GDP since then. Instead, cuts in government spending over the last eight years have had a pernicious, negative impact on output and income, as well as on jobs and wages, which depend on the level of spending in the economy. If it weren’t for these cuts, the economy would likely be fully recovered by now, and the expansion would have equaled or exceeded the Bush recovery.
Meanwhile, Figure B compares data on the total size of each expansion with changes in total government spending in each period. If government spending had increased by 11.7 percent, as it did during the Bush recovery of 2001-2007, the present expansion, which was constrained by a 6.1% decline in government spending, would easily have exceeded the size of the Bush expansion. If government spending had increased by 33.5 percent, as it did during the Reagan recovery (1982-1990), then the Obama recovery would surely rank as one of the strongest on record. We would be enjoying true full employment and rapid GDP growth, as we did in the late 1980s.
It is not too late for federal spending to strengthen the recovery. As Dean Baker notes, economists know that the way to get out of a depression is by “spending money.” Larry Summers has recently been a strong advocate for infrastructure investments, in particular, arguing that they have a high social rate of return and are thus largely self-financing. But instead of boosting spending, as is typical in a recession, Congress has abandoned fiscal policy, largely refusing to fund even normal (inflation- and population-adjusted) increases in government spending, as my colleague Josh Bivens has noted repeatedly (Josh will be releasing a paper exploring this same topic in depth in the coming weeks). Many state governments also made damaging spending cuts, and state government employment today is still below 2009 levels.
Recent polls from Gallup and NBC News/Wall Street Journal indicate that between 75 and 82 percent of the public thinks that the nation is on the “wrong track.” It is critically important that the public understands why we’re on that track. But for the cuts in federal spending imposed by the Republican-dominated Congress, the economy would be roaring now. Those responsible for this mess should be held responsible for their economic incompetence.
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This was reposted from the EPI.
