Why has the recovery from the recession been so slow? Part of the answer is that recessions caused by a collapse of the financial sector are among the hardest to recover from. But that is not the only reason for the slow recovery. Many additional factors are often cited for the agonizingly slow recovery, some real and some bogus. Let’s begin with the real reasons for the slower than necessary recovery, and then turn to bogus reasons that have been used to support ideological goals:
The failure to address household balance sheet problems: When a recession is caused by a financial meltdown like we recently experienced, a “balance sheet recession” as it is known, an important part of the policy response is to repair balance sheets that have been severely damaged by declines in the value of financial assets and housing. Policymakers did a pretty good job of repairing bank balance sheets, and that certainly helped our prospects for recovery. But they did a very poor job of repairing household balance sheets wiped out by declines in housing and stock values. Households had no choice but to reduce consumption and increase saving to slowly rebuild their balance sheets, and the prolonged decline in consumption as balance sheets were rebuilt made the recovery much slower than it needed to be.
Poor fiscal policy. The stimulus package was much too small, and too short in duration to produce the fastest possible recovery. In addition, there have been substantial cuts in government spending at the state and local level and those cuts have hampered the recovery. If federal authorities had done more to help state and local governments – much more – the economy would have recovered faster. We also needed a substantial effort at job creation anchored by infrastructure projects as a follow-up to the initial stimulus package, but instead we got budget cuts in the US and Europe – austerity – that slowed the recovery.
Monetary policy: Monetary policy was much better than fiscal policy, but even so it was too slow to react, too timid, and beset with communication problems that have recently caused long-term rates to rise and work against recovery.
Technological change: The recovery of GDP has been slow, but the recovery of labor has been even slower. One of the reasons for this is that employers lay off workers in recessions, and then replace them with machines, computers, and robots when things improve.
The Distribution of Income: Corporations are sitting on piles of cash, and they are reluctant to use the money for new investment because they aren’t sure they will pan out when the demand for goods and services is so low. However, if a substantial fraction of that cash had been paid to workers as wages instead of being misdirected to owners as profits, the demand for goods and services would be much higher and the outlook would be much brighter.
There are also many reasons that are claimed to have slowed the recovery, but when the evidence is examined there’s little support for these claims. Instead, they appear to be mostly driven by ideological goals such as smaller government, the elimination of social insurance programs such as Social Security, Medicare, and Obamacare, and lower taxes on the wealthy:
People are too lazy to work, they would rather rely on social programs: This objection is common, but it is off the mark. First, while it’s true that we can find people who abuse any program, social insurance plays an important role as an automatic stabilizer. When the good part of these programs – stabilization – is stacked up against the relatively small amount of abuse, it’s clear that they are highly beneficial on net. Second, this criticism assumes that there are jobs for anyone who really wants to work, but that is simply not the case. The number of people seeking work has far exceeded the number of available jobs and no amount of desire to work can overcome that hurdle.
Obamacare: The claim here is that uncertainty over Obamacare is constraining hiring, and leading to more part-time work as employers attempt to evade the new health care law. However, neither claim is supported. Surveys of firms do not indicate that Obamacare is a problem for hiring, and the rise in part-time work is due to other factors.
The debt: The debt is often cited as a problem for those who want to reduce the size of government, but the usual problem with high debt – high interest rates that deter investment – has not happened. In addition, the idea that reductions in debt will create so much confidence it will stimulate the economy far beyond the negative effects of the budget cuts – the foundation of austerity – has been proven false by the events in Europe. The contraction from the budget cuts is very real, but there is no offsetting positive effect from the “confidence fairy.”
Uncertainty over regulation and future taxes: We are told that uncertainty over financial regulation, health care regulation, and future taxes is constraining business activity, but when businesses are surveyed about this these items are not very high on the list. Instead, lack of demand is cited as the main factor constraining business investment and hiring.
Failure to coddle the wealthy: If only the taxes on the wealthy were lower, these “job creators” could turn “takers” into “makers”. But this is nothing more than the trickle down theory that failed during the Bush years – the evidence is quite unfavorable to this idea – and there’s no reason to think this time is different.
The recovery from balance sheet recessions is always difficult, but it didn’t have to be this slow. The failure of fiscal policymakers in Congress in particular, some of whom put ideological goals ahead of the interests of families struggling to make ends meet, has prolonged the misery induced by the Great Recession.