Beating Back the Flames of RECESSION

Every month, the number of jobs added to the economy gets a lot of publicity. Recently, the economy has added about 200,000 jobs a month, which, combined with headline unemployment of 5 percent, sounds and feels good.

But there is a story these numbers do not tell, and a darker reality that is less publicized.

According to various estimates, there are between two and seven million Americans who are not working and have stopped looking for employment. According to the American Enterprise Institute, just counting men, there are seven million — ages 25 to 54 — in this category.

These folks live in deep and dire poverty. Many are homeless and lack access to a computer or transportation, both of which they need to apply for jobs, training or housing. These men are not included in the official unemployment numbers.

According to the Bureau of Labor Statistics, there are seven million officially unemployed and nearly six million people who are working part-time but want to work full-time. Altogether, the actual total of unemployed and underemployed is around 20 million.

The Great Depression
Economist John Maynard Keynes recognized that business investment was the most unstable element in modern economies and likely to cause the most severe unemployment. Keynes suggested increased government spending could balance declining business investment to restore normal levels of unemployment.

During the Great Depression, business investment evaporated, unemployment was greater than 35 percent and the total size of the economy was diminished.

To combat the Great Depression, President Franklin Roosevelt introduced the New Deal, which increased federal government spending dramatically between 1933 and 1937. This action, along with looser monetary policy, brought the economy back to life as business investment returned. By 1937, the economy was larger than before the Great Depression. Unemployment fell from 35 percent to 20 percent and the size of the economy nearly doubled.

But the New Deal was an experiment and Roosevelt decided to go in a different direction in late 1937. Bank lending was curtailed by tighter monetary policy and federal government spending was markedly reduced. This reversed the recovery, as business investment fell, unemployment climbed higher and the economy shrank. Some have labeled this a double-dip recession.

Do the actions of the New Deal have practical lessons for the present?

Great Recession
During the Great Recession of ’08-’09, business investment declined substantially, seven million people lost their jobs and the size of the economy contracted.

To resuscitate the economy, President Barack Obama initiated the federal stimulus, which increased federal government spending, and the Federal Reserve Board lowered interest rates. By the second half of 2009, business investment returned, layoffs were declining and GDP was growing.

Government Spending Declines
Since 2011, the U.S. Congress has decided to reverse the Obama stimulus by restricting federal government spending. In the last six months, business investment has retreated to Great Recession levels and economic growth has slowed to a crawl.

Investment bank Morgan Stanley says policymakers may be repeating the same Great Depression-style mistakes that led to the double-dip recession in 1937. It warns “policy decisions today contributed to the slowdown in recent quarters.” The report clarifies that it’s critical to “ensure aggregate demand is supported by boosting public demand.”

According to the investment bank, the U.S. economy is about to experience its fifth consecutive year of below-average growth. It suggests increased public spending “particularly now when [interest] rates are still low, could lead to a virtuous cycle, where the corporate sector takes up investment, thus sustaining job creation and income growth.”

A recent headline in the Wall Street Journal read, “It Has Never Been Cheaper for Cities and States to Borrow Money.” Yet states and cities have reduced borrowing for construction projects by two-thirds. Also, federal construction grants to states and cities have been cut nearly in half.

In California, borrowing is almost 40 percent lower than it was in 2009 and construction spending for the next five years has been cut by an additional 28 percent. Florida has refused to fund its main construction program for public schools and universities for the last five years.

Infrastructure Needs
The McKinsey Global Institute, the American Society of Civil Engineers (ASCE) and former Treasury Secretary Larry Summers have recommended increasing infrastructure spending by $1 to $2 trillion over the next decade. This investment is needed to meet transportation, water, energy and telecommunications requirements. It is also needed to boost business investment and employment.

S&P Global Ratings analyst John Sugden and Secretary Summers have written that delaying repairs could drive up construction costs in the long run.

Borrowing costs have never been lower, materials costs are down and the expanding hole at the bottom of the wage ladder has rarely been more pronounced.

Politics
Both presidential candidates have voiced support for increased infrastructure spending.

Secretary Hillary Clinton’s plan calls for a combination of borrowing and spending to increase public construction spending by $500 billion over the next decade. This falls well short of what ASCE, McKinsey and Summers recommend.

Donald Trump has pledged to spend twice as much as Clinton, but has provided few details. As his tax plans are projected to shrink federal revenue, it’s difficult to view his spending pledges seriously. He has discussed the use of debt financing but has also set aggressive targets to reach a balanced budget.

Conclusion
History, economics, infrastructure needs and crippling unemployment demand significantly increased spending to rebuild America. How long will these economic needs be thwarted by the politics of fiscal minimalism?

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Gaillard is a legal assistant and former Congressional staffer.

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october, 2021

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