“The Way Forward: Moving from the Post-Bubble, Post-Bust Economy to Renewed Growth and Competitivene

Posted under Resources on October 16, 2011

From the New America Foundation:

Notwithstanding repeated attempts at monetary and fiscal stimulus since 2009, the United States remains mired in what is by far its worst economic slump since that of the 1930s.1 More than 25 million working-age Americans remain unemployed or underemployed, the employment-to-population ratio lingers at an historic low of 58.3 percent,2 business investment continues at historically weak levels, and consumption expenditure remains weighed down by massive private sector debt overhang left by the bursting of the housing and credit bubble a bit over three years ago. Recovery from what already has been dubbed the Great Recession has been so weak thus far that real GDP has yet to surpass its previous peak. And yet, already there are signs of renewed recession.

It is not only the U.S. economy that is in peril right now. At this writing, Europe is struggling to prevent the sovereign debt problems of its peripheral Euro-zone economies from spiraling into a full-fledged banking crisis—an ominous development that would present an already weakening economy with yet another demand shock. Meanwhile, China and other large emerging economies—those best positioned to take up worsening slack in the global economy—are beginning to experience slowdowns of their own as earlier measures to contain domestic inflation and credit-creation kick in, and as weak growth in Europe and the United States dampen demand for their exports.

Nor is renewed recession the only threat we now face. Even if a return to negative growth rates is somehow avoided, there will remain a real and present danger that Europe and the United States alike fall into an indefinitely lengthy period of negligible growth, high unemployment and deflation, much as Japan has experienced over the past 20 years following its own stock-and-real estate bubble and burst of the early 1990s.3 Protracted stagnation on this order of magnitude would undermine the living standards of an entire generation of Americans and Europeans, and would of course jeopardize Americas position in the world.

Our economic straits are rendered all the more dire, and the just mentioned scenario accordingly all the more likely, by political dysfunction and attendant paralysis in both the United States and Europe. The political stalemate is in part structural, but also is attributable in significant large measure to the nature of the present economic crisis itself, which has stood much familiar economic orthodoxy of the past 30 years on its head. For despite the standoff over raising the U.S. debt ceiling this past August, the principal problem in the United States has not been government inaction. It has been inadequate action, proceeding on inadequate understanding of what ails us.

Since the onset of recession in December 2007, the federal government, including the Federal Reserve, has undertaken a broad array of both conventional and unconventional policy measures. The most noteworthy of these include: slashing interest rates effectively to zero; two rounds of quantitative easing involving the purchase of Treasuries and other assets, followed by Operation Twist to flatten the yield curve yet further; and three fiscal stimulus programs (including the 2008 Economic Stimulus Act, the 2009 American Recovery and Reinvestment Act, and the 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act) and the 2008 Troubled Asset Relief Program to recapitalize the banks.

Read more at newamerica.net