The economy is recovering from the Great Recession and employers are hiring more workers every month. But, like most economists, I still think the economy and the job market are in a slump. The seeming contradiction arises because the term "recovery" characterizes how we've been moving in the right direction, while the term "slump" characterizes how far we remain from where we want to be.
The chart, below, from the Center on Budget and Policy Priorities' "Legacy of the Great Recession" chart book, illustrates the difference:
- The blue line shows the Congressional Budget Office's (CBO) estimate of the real (inflation-adjusted) gross domestic product (GDP) that producers could supply with existing factories, machines and stores if there were enough demand to support full employment of the labor force (potential GDP).
- The red line shows that actual GDP has been growing since mid-2009 but at a pace that merely keeps pace with the growth in potential GDP. The gap remains, well, gaping – and quite large compared to past recessions and recoveries.
- The dotted line shows CBO's projection that real GDP growth will pick up and eventually close the gap – but not until 2017.
This sluggish growth has produced a prolonged jobs slump, as illustrated in the next chart from CBPP's chart book, which shows the level of payroll employment after the onset of recent recessions relative to its level at the start of those recessions. While the economy has been digging its way out of the jobs hole from the Great Recession for several years – and at a pace similar to that of the recovery from the 2001 recession – it will be many more months before we return even to where we were in late 2007. It will take even longer to return to full employment, since the population and potential labor force have been growing in the meantime.
All in all, this is a disappointing recovery, although as President Obama correctly noted in last week's Knox College speech, we've done far better than most other advanced economies. Two important reasons are the 2009 Economic Recovery Act, which provided significant stimulative tax cuts and spending measures, and the Federal Reserve's willingness to embrace unconventional monetary policy tools.
Still, "it could have been worse" is no rallying cry. The president is offering ideas, but Republicans dismiss them. That's where we've been since Obama was elected. It worked for Republicans in the 2010 congressional elections and it may work for them again. But, it's not working for the economy.
Pair that political strategy with the GOP's extreme economic ideology and you have a recipe for policy gridlock. A year ago on this blog, I questioned the premises guiding conservative policymakers – the view that immediate sharp cuts in government spending were needed to prevent a looming debt crisis and that the Fed's monetary policy was a recipe for inflation. I argued that any inflationary or debt costs from pursuing a more expansionary policy were far outweighed by the economic costs of accepting too-high unemployment.
Nothing that's happened since has changed my view. First, evidence has mounted that short-term budget austerity is particularly harmful under the economic conditions that advanced economies have faced since 2008. Second, the long-term budget outlook is more manageable than it seemed a year ago. As a result, we can realistically contemplate – at least in terms of budget arithmetic – a deficit-reduction package that provides upfront stimulus to give the recovery a boost combined with enough longer-term deficit reduction to put the debt on a declining path relative to the size of the economy.
That, of course, would require policymakers on both sides of the aisle to make difficult political choices. But isn't that what we've elected them to do?
Chad Stone is chief economist at the Center on Budget and Policy Priorities.
- Read Stan Veuger: Solving the Chicken-or-Egg Job Experience Problem
- Read Jim Lardner: Wall Street's Weak Arguments Against a New Glass-Steagall
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