It seems to me…
“Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and our freedom.” ~ Viktor E. Frankl.
The U.S. economy has gone through a series of recessions: the 1990s, 2001, and most recently in 2009. Each of these was followed by what is termed a “jobless recovery”. A jobless recovery is where the economy grows too slowly to reduce the unemployment rate. This latest recession, however, is the only one of these that resulted in a liquidity trap.
While the U.S. is showing definite signs of recovery in those areas where recovery has lagged. It is fair to say that in the debate over the proper approach to recovery that events have proven the Keynesians correct; the austerians wrong. Not only were the austerians wrong, their insensitive demands subjected the U.S. to prolonged low employment and low growth. It is extremely unfortunate that many people were made to pay the price of conservative reluctance and unwillingness to make investments necessary to actively promote full recovery. Even today, when so much remains to be done – training/retraining workers, immigration reform, infrastructure repair/improvement, educational funding, STEM investment… – conservatives refuse to admit they were wrong.
While much of the recovery can be attributed to U.S. inherent resilience, credit also has to be given to the rapid federal response to the financial crisis: a moderate stimulus, bailout of overextend financial institutions, takeover (and restructuring) of automotive companies, and investment by the Federal Reserve.
I am not an economist but from undergraduate Econ-101 classes and economic texts I have read, when a nation is caught in a liquidity-trap, as the U.S. and several other countries now are, the federal government needs to stimulate the economy through public-sector investment. Only following an increase in demand (consumer spending) will the private-sector correspondingly increase investment.
While much later than appropriate, the U.S. unemployment still would benefit greatly from additional stimulus investment applied primarily to national infrastructure. The U.S. stimulus in 2009 took too long to implement and was much too small considering the size of the U.S economy though it was sufficient to prevent the U.S. from slipping into a full 1939-style depression. In addition, much of the stimulus was in the form of tax reductions that either were invested or used to reduce personal debt-overhang rather than being applied to create market demand.
Federal interest rate reductions, the more traditional method of economic stimulus employed by a national bank, are ineffective when the prevailing interest rate approaches zero percent. Other methods, such as currency devaluation (as employed by Australia during the 1996 Asian economic crisis) also are unavailable to a free-floating monetary system such as the U.S. It is import to remember that budget deficits in a depressed economy do have not any influence on interest rates nor do they crowd out private investment.
Deficit reduction austerity policies and higher interest rates during periods of economic depression and elevated unemployment are advocated primarily by those philosophically oriented toward financial markets and whose highest priority is avoidance of debt default; they oppose any monetary policy that potentially could reduce monetary returns as a result of low interest rates or inflation.
So what happens? More austerity because a political party dedicated to the proposition that less government always is better blackmailed President Obama into accepting the sequester and now uses its blocking power to prevent any solution and Obama has chosen not to make this a central political issue[i].
One of the most critical things to remember is that austerity (as implemented in Europe and recommended by U.S. conservatives) is never advisable during an economic downturn. The time to balance a budget or national debt reduction is when the economy is prosperous — not now.
That’s what I think, what about you?
[i] Krugman, Paul. Against Stupidity, The IMF Itself Contends In Vain, The New York Times, http://krugman.blogs.nytimes.com/2013/06/15/against-stupidity-the-imf-itself-contends-in-vain/, 15 June 2013.