It is called the Great Debate, because it began during the Great Depression. Should government stimulus be used to bring an economy out of recession-depression? Or, should private business play it out, and the weakest fall while the strongest survive to start anew?
A 25 percent jobless rate and closing of 9,000 banks during the decade of the Great Depression was horrific, and the reason no one wants a repeat performance. That is why President Obama pushed for ARRA, the American Reinvestment and Recovery Act. And it succeeded in stopping what could have been a second Depression.
Christina Romer, Obama’s chief economist and an economic historian of the Great Depression, told us why it was so important at a recent William and Mary College graduation. “The economic situation facing the new Administration was unlike any we had seen since the Depression. In January 2009, the economy was losing more than three-quarters of a million jobs per month. Output was plummeting and businesses were closing their doors at an alarming rate. The financial system was seized with fear and key flows of credit, the lifeblood of our economy, virtually evaporated. Though not a depression, this truly was a Great Recession.”
It is interesting who has taken sides on this debate—a debate really between the haves and have nots. Creditors—mainly banks and other holders of debts—don’t want their debts devalued, so they advocate letting the weak fall, which can cause deflation and so enhance the value of debt. The debtors on the other hand, want any stimulus they can get to ward off failure and preserve what equity they have left.
So demand and prices fall, and businesses cut back on production and jobs—unless government steps in. The signature trait of a serious recession is some form of hoarding—by consumers who stop spending to pay down their debts, and investors seeking safe investment havens like U.S. Treasury securities.
“The signature action to fight the recession was the American Recovery and Reinvestment Act. This was simply the boldest countercyclical fiscal stimulus in American history,” said Dr. Romer. “It was unquestionably bolder than the fiscal actions pursued in the New Deal. The Recovery Act included tax cuts and expenditures equal to more than 4 percent of GDP spread over two years. At its largest, the fiscal expansion under Roosevelt was just 1½ percent of GDP. And, that did not occur until the Depression had been going on for six years, and it was counteracted by an equally large fiscal (i.e., spending) contraction the very next year.”
The Congressional Budget office has estimated that up to 3.7 million jobs will be saved or created as a direct result of ARRA, and more as a result of the Federal Reserve holding down interest rates that stopped real estate prices from falling further. This is a veritable drop in the bucket compared to the estimated $4-5 trillion in lost output during this recession that cost 8 million jobs.
Despite the disappointing headline number for payroll jobs (just 41,000 of the 413,000 jobs created were non-governmental), there actually was some favorable news. The gains in temps and workweek point to future hiring. Personal income should be strong for May. The aggregate hours jump for manufacturing suggests a robust increase in industrial production for the month. Yes, the underlying trend in jobs is less than hoped, but recovery is still underway. And we are getting some “fiscal stimulus” from the Census hires, says Econoday.
Construction spending also improved after a winter slump. The April boost was led by a jump in private residential outlays which gained 4.4 percent after no change the prior month. Public outlays increased 2.4 percent in the latest month while private nonresidential construction also rebounded 1.7 percent after a sustained drop.
Another positive economic indicator was that car and truck sales proved very solid in May, at an annual adjusted rate of 11.6 million surpassing April's 11.2 million and ranking alongside March's incentive-driven spike of 11.8 million. Strength was centered in domestic-made trucks which jumped 8.6 percent to a 5.1 million unit pace. Why is the jump in truck sales important? Because trucks are used by businesses, which points to more economic activity!
So the recovery is not so sluggish, considering the obstacles it still faces with the $1 trillion drain of 2 wars being fought and Wall Street still looking for ways to evade regulation. Spending and production are running ahead of jobs numbers. These point to continued moderate improvement in the recovery—and a recession that is certain to be shorter than the Great Depression.
Harlan Green © 2010
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