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This article examines the causes and effects of the Great Recession on the U.S. economy, including the collapse of the housing market and the transmission of the financial crisis to the real economy. It discusses the initial response to the crisis through large-scale countercyclical interventions and the subsequent shift towards austerity measures. The article also explores alternative approaches to austerity, such as egalitarian full employment agenda and green growth.
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The U.S. Economy, 2007 – Today:Collapse, Stimulus, Austerity, “Recovery” Robert Pollin Department 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
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
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
Federal Funds Rate After Crisis:Unprecedented Zero Interest Rate Policy
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
Government Debt Grew but Interest Payments on Debt Reached Historic Lows
Business Borrowing Rate Does Not Fall with Federal Funds Rate
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
