The U.S. Economy, 2007 – Today:Collapse, Stimulus, Austerity, “Recovery”

Robert PollinDepartment of Economics and

Political Economy Research Institute (PERI)University of Massachusetts-Amherst

November 3, 2015

Wall Street Hyper-speculation Caused the Great Recession

• Erosion of financial regulations over decades and formal repeal in 1998 led to massive bubble in U.S. housing market– Collapse of housing bubble was proximate cause

of financial crisis and recession

Collapse of U.S. Household Wealth

Financial Market Collapse Transmitted to Real Economy

• Transmission begins immediately in U.S. economy, then moves to Europe

Fall of U.S. Macro IndicatorsSources: U.S. Bureau of Labor Statistics; OECD Statistics

U.S. GDP U.S. Unemployment

Narrow unemployment

Broad unemployment

2007 $14.9 Trillion 4.6% 8.8 (December)

2009 $14.4 Trillion 9.3% 17.1 (December)

Change from 2007 - 09

- 3.4% GDP Decline + 4.7% rise in narrow unemployment

+8.3% rise in broad unemployment

Initial Response to Crisis:Large-Scale Countercyclical Interventions

• Three types of countercyclical interventions:– Fiscal Deficit Spending– Monetary Stimulus

• Targeting short-term interest rates• Targeting long-term interest rates

– Financial sector bailouts

7

0

2

4

6

8

10

Rise in U.S. Fiscal Deficits as Response to Crisis

Fis

cal d

eficits a

s p

ct. o

f G

DP

1950 -2015average

2007 2008 2009 2010 2011 2012 2013

2.2%

3.1%

9.8%

1.1%

8.8%8.4%

6.8%

4.1%

Deficits after Great Recession

Source: U.S. Office of Management and Budget

2.8%3.2%

2014 2015

8

Federal Funds Rate After Crisis:Unprecedented Zero Interest Rate Policy

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Inte

rest ra

te

5.3%

0.11%

Source: Economagic website

Financial Market Bailouts

• U.S. Treasury Bailout of Banks– $800 billion

• Federal Reserve Bailout of Banks and Money Market– $2-3 trillion

Bailout Operations Did Not Produce Immediate Recovery (of course)

• Shift in Priorities:– In mainstream circles, fundamental problem

quickly becomes government debt, as opposed to mass unemployment, social crises

• Ascendency of Austerity Hawks

Austerity Hawks as Variant on Neoliberalism

• Stimulus policies will create inflation and rising interest rates

• “Ricardian Equivalence”– Stimulus policies are always ineffective—R. Barro

• Public debt > 90% of GDP = growth collapse – Reinhart/Rogoff

• Austerity policies will be stimulus– Alberto Alisina—”confidence fairy”

• Capitalist economies are self-adjusting– Pigou effect/labor market flexibility

12

Government Debt Grew but Interest Payments on Debt Reached Historic Lows

20

30

40

50

60

70

80

90

100

110

1940 1950 1960 1970 1980 1990 2000 2010

Figure 3. U.S. Federal Government Debt Owed to the Public

as a Share of U.S. GDP, 1940 - 2013

Fed

era

l deb

t as a

perc

en

tag

e o

f G

DP

Source: Economic Report of the President 2013

Debt increasesunder Reagan

and Bush-1

World War IIdebt increases

Debt increasessince Great Recession

Note: 2012 and 2013 figures are estimates

13

0

2

4

6

8

10

12

14

16

1940 1950 1960 1970 1980 1990 2000 2010

Figure 4.U.S. Federal Government Interest Payments as Share

of Total Government Expenditures, 1940 - 2013

Source: U.S. Office of Management and BudgetNote: 2012 and 2013 figures are estimates

Fed

era

l in

tere

st p

aym

en

ts a

s p

ct.

of to

tal f

ed

era

l exp

en

ditu

res

1945 - 50interest burden:10.1%

Interest burdenunder Reagan andBush-1:12.9%

Interest burdensince 2009:6.4%

Average interest burden 1940 - 2013: 9.1%

14

No Rise in Inflation and Interest Rates

1

2

3

4

5

6

7

8

Inflation

1953 - 20083.8%

5-Year Treasuries

1953 - 2008

1.6%

6.2%

2009 - 20121.6%

2009 2012

Infl

ati

on

an

d in

tere

st r

ates

, in

perc

enta

gesFigure 2.

U.S. Inflation and Government Bond Interest Rates:

Source: Economagic

Long-term Patterns (1953 - 2008) and post-Great Recession Fiscal Deficit Spike (2009 - 2012)

But Weak Recovery 1:GDP Growth

Weak Recovery 2:Unemployment

17

Business Borrowing Rate Does Not Fall with Federal Funds Rate

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Inte

rest ra

tes

5.3%

FederalFundsRate 0.4%

6.6%

9.2%

4.5%

0.11%

Baa CorporateBond Rate

Source: Economagic website

18

Credit Flows to Small Business Remains Weak

-300

-200

-100

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Lending to Non-Corporate Businesses Since Recession

Figures are billions of real 2014 dollars

Bill

ion

s o

f 2014 d

olla

rs

$514 billion

-$209 billion

$193 billion

Source: U.S. Flow of Funds AccountsNote: Inflation adjustment is with GDP deflator. 2014 figures arethrough first 2 quarters.

19

Banks are Borrowing at Zero Interest Rate and Hoarding Cash

0

500

1,000

1,500

2,000

2,500

3,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cash Reserve Holdings by U.S. Commercial Banks,2005 - 2014

In billions of 2014 dollars

Bill

ion

s o

f 2014 d

olla

rs

Source: U.S. Flow of Funds Accounts

$22 billion

$940 billion

$2.5 trillion

U.S. Economy at Present

• Official unemployment down to 5.1%, but:– Including underemployed, labor market drop-outs, around 13%

• Wage stagnation and rising inequality– Top 1% received 91% of all income gains since 2009

• Attack on Public Sector – Cuts in social services—food security cut for 47 million– Cut public sector worker wages– Attacks on public sector unions– Enable states to declare bankruptcy on public pension funds—

Jeb Bush• “Recovery “ as Neoliberal Restoration

Alternatives to Austerity:Egalitarian Full Employment Agenda

• “People’s Quantitative Easing”• Funding public investments through central bank municipal

bond purchases– “Pulling on a String” – Employment expansion-1

• Restore State and Municipal Government Spending:– Employment expansion--2

• “Robin Hood” Financial Market Taxes • Living Wages• Green Growth