Our Dismal Economic Stagnation
Diagnosing the Slowest Recovery Since the Great Depression
The Bureau of Economic Analysis has reported that in the first quarter of this year the U.S. economy declined at a 0.7 percent annual rate. Although growth may be higher for the rest of the year, this is another reminder of how slowly the economy has grown during more than five years of economic recovery from the recession of 2008-09. The rate of economic growth for the 23 quarters since the second quarter of 2009 is the slowest for any economic recovery since the Great Depression. These results are not due to bad luck, they are due to bad policy — particularly the Federal Reserve’s enormous expansion of the monetary base and the near doubling of the federal government’s debt since the end of 2007, both of which have been supported by the Obama administration.
In response to the financial crisis of 2008, the Federal Reserve used newly created money to purchase hundreds of billions of dollars of mortgage-backed securities and government debt. Because much of the newly created credit was used to buy the bad loans that were the cause of the financial crisis, less money was available to invest in productive capital, which would have contributed to job creation. The resulting low interest rates also made it easier for the government to borrow and spend on boondoggles such as “cash for clunkers” and to expand programs like unemployment compensation and food stamps. Instead of creating jobs, extended unemployment compensation and increased eligibility for food stamps made it easier for unemployed workers to turn down job opportunities.
Keynesian economists like Paul Krugman argue that the recovery would have been stronger if the government had provided more economic stimulus spending. In their view, more government spending was needed to increase demand for goods and services and create more jobs, which in turn would have had a multiplier effect on the output of the economy. They ignore the fact that someone has to pay for the additional government spending, and as a result, fewer resources are available for private-sector firms to invest and create jobs.
Recessions can eliminate the excesses caused by a credit-fueled economic boom. Without bailouts, firms that borrowed heavily to invest in unprofitable projects would be forced to liquidate those investments. Declining demand during recessions leads to falling prices, which give incentives for consumers to buy more of the goods and services they want, thus leading to the creation of new jobs. Economic stimulus spending and Federal Reserve monetary expansion prevented prices from falling and capital from being reallocated to produce the goods that consumers wanted. The Troubled Asset Relief Program (TARP) funneled government money to firms that took too much risk and should have gone bankrupt while the Federal Reserve used newly created money to rescue banks from the consequences of reckless lending.
The policies that caused the financial crisis and the bailouts and unprecedented monetary expansion that followed were chosen by the Federal Reserve, the Bush administration, and the Congress to benefit politically powerful interest groups that included financial services firms and wealthy investors. Barack Obama had an opportunity to repudiate these policies when he took office. Instead, he not only supported them but also expanded them. In addition, he reappointed Ben Bernanke as chairman of the Federal Reserve Board of Governors in 2010, in spite of the irresponsible policy choices he presided over during the financial crisis.
Bernanke’s policies emphasized helping banks, particularly the large money center banks, whose balance sheets were loaded with bad mortgages and other toxic assets. By keeping interest rates close to zero, monetary policy under Bernanke made it much more difficult for ordinary Americans to save for retirement. This policy did, however, enable large banks’ profits to soar so they could offset their losses during the financial crisis.
Although his first campaign was all about change, President Obama, as much or more than his predecessors, supported bailouts, subsidies and regulation that rewarded politically powerful businesses and created obstacles for responsible entrepreneurs. These included the practice of allowing small businesses to bear the full consequences of their losses, while firms the government deems too big to fail won special benefits if they were mismanaged. To this fiscal folly he added health care reform, which was designed in such a way as to enhance the profits of large insurance companies while its mandates discourage job creation.
The slow recovery since 2009 is the consequence of Federal Reserve monetary policy and a series of ill-conceived policies by the federal government, most of which began before Barack Obama took office. By endorsing and in some cases expanding these policies, President Obama must bear some of the blame for the results. Instead of correcting the bad policies that caused the crisis, he used the crisis as an excuse to expand the government’s control over the economy, further hampering the ability of businesses and entrepreneurs to create jobs and restore economic prosperity.
Dr. Tracy C. Miller is an associate professor of economics at Grove City College and fellow for economic theory and policy with The Center for Vision & Values. He holds a Ph.D. from University of Chicago.
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