Policy effectiveness and the slow American economic recovery after 2008

Slow USA Econ Recovery

Chapter IV -- Summary

Chapter V -- Recommendations

There has always been a disharmony between economic theory and economic reality as it relates to the actions execute to stimulate and sustain economic growth. Whether it be Keynesian actions or actions more tailored towards the supply-side argument, there is not always a smooth translation between economic practice and the ensuing results. At the very least there is always a lag and it is sometimes hard to decipher where action "A" truly led to result "B" and/or whether it even inhibited it.

This line of thought has become even more poignant and clearer through situations like the economic recovery in the United States after the so-called "Great Recession" that ran from 2007 to 2009. Even though the United States is now four years removed from the "end" of the Great Recession, the United States economy has been rather anemic as its gross domestic product growth, overall unemployment rate and other metrics have all been paltry to poor or, at the very least, inconclusive.

This report seeks to explore the apparent disconnect between the numerous policy tools that have been used to combat the recession and get more sustained growth going in the United States and the results that have ensued after the fact. Even with several stimulus incentives for both employers and taxpayers, several rounds of quantitative easing by the Fed and other policy levers, the results have been mixed to downright poor as the unemployment rate and GDP growth metrics, among others, remain poor even now in 2013 more than four years removed from the "end" of the recession and six or seven from the start of the same. Given that most recessions end with no intervention at all within 12 to 18 months, this has certainly not been the case with the Great Recession. Even in light of 9/11 and other economic challenges in 2001 and around that time, the economy was roaring quite well not long after that and certainly not 4-5 years after the fact.

Chapter III - Literature Review

The invective that is lobbed back and forth as it pertains to is even prevalent when looking at scholarly articles, many of them peer-reviewed, based on the choice of words and angles of approach in the articles. For example, on such article refers to "activist" economic policies enacted by the government or at least proposed. The article, written in 2010, starts off directly calling the first-time buyer's tax credit, the temporary tax cuts and the American Recovery and Reinvestment Act (ARRA…commonly referred to as the Obama stimulus plan) as "activist" economic policies (Hein & Truger, 2009).

Indeed, many people said much the same thing about many George W. Bush initiatives. A good example would be the "Bush Tax Cuts" which were the subject of much debate. Many supply-side and conservative minds suggested that the tax cuts were necessary in light of what was going on from 2001 to 2003 so as to incur and spur economic growth and business investment spending. Many leftists and progressives condemned the cuts as "tax cuts for the rich" and, regardless, not conducive to economic growth (Hein & Truger, 2009).

The "cash for clunkers" credit is also pilloried. The totality of the plan's cost came to a total of roughly 5.5% of one year's GDP by themselves (Auerbach, Gale & Harris, 2010). A different article notes that despite the "activist" overtones that some people intimate, the deficit and surplus spending of many countries often tend to be in sync. Exactly that happen from 1996 to 2005 for the countries of Sweden, France, Germany and the United Kingdom (Hein & Truger, 2009).

The key, per the Hein article, is to identify the GDP trend over the last six years with an overall inflation rate of two percent. This arbitrary rate of two percent, and not the actual inflation rate over the actual time period, is used to smooth about aberrations and outliers that can and often do occur in the short-term. Since two percent is very close to being the long-run growth rate for inflation, it serves as a good barometer to what to use when analyzing GDP and other related economic data over a period of more than a few years at a time.

A counterpoint to the Auerbach treatise mentioned above notes that even deficit spending is sky-high and economic conditions are awful, resorting to austerity is never a solution. Even with the ever-climbing United States aggregate debt, the article drives home the point that the government cannot draw back on important social services and investments lest the economic travails become even more pronounced and elongated. The article concedes, however, that declining business confidence is an absolute danger that must be dealt with and the government not being an active partner with businesses and in favor of the recovery will just make things worse (Pollin, 2010).

A similar point is made in a different article that states that the role of fiscal policy in pushing an economy towards recovery cannot be over-estimated or over-analyzed because of the vital role fiscal policy plays in said recovery. The article notes that the impact (or lack thereof) of programs like Temporary Assistance to Needy Families (TANF), Medicare, tax credits, Social Security, direct subsidies, unemployment insurance and such are often included in any analysis of fiscal policy but it also noted that many parties that look at this topic glaringly omit are transfer payments and other assistance paid directly to financial institutions (Tcherneva, 2012).

This perhaps became a much less hidden topic when the Troubled Asset Relief Program (TARP) was unlashed in 2008 and its "part two" program referred to as the Financial Stability Plan of 2009. The latter is often referred to as "TARP II" in many circles. The article notes, however, that the real issue in the Great Recession (and as noted by other authors cited in this literature review) is that the job market being in such dire straits was the real issue and that infusing money into credit markets was just a "Band-Aid" and did not address the real issue. The article labels the policies of both George W. Bush and Barack Obama as being inadequate in this regard (Tcherneva, 2012).

That same article also points out that as late as mid-2008, more than six months after the Great Recession had started in late 2007, even the Congressional Budget Office (CBO) was projecting economic growth of 1.9% in 2008 and 2.3% in 2009 with unemployment rates in the five percent ranges. Of course, in hindsight, that is not even close to what happened and 2008 was a disastrous year from an unemployment and GDP growth perspective and the recession didn't end until 2009 (Auerbach, Gale & Harris, 2010).

As far as hidden symptoms that make growth anemic to non-existent, one article points to the situation whereby many employers seeking skilled laborers are unable to find the qualified people that they need and the article states clearly that this is a factor and condition that can threaten or at least slow down economic growth or recovery. The article points to engineering in particular as being a field where the job postings out there are not met with strong applicants that have the tools, education and skills to fill those jobs to a level that would be acceptable to the hiring managers and firms (Lenton, 2009).

Another bit of research suggests that while the economic growth in the 2000's was moderate, a lot of that growth was driven not by organic and sustainable job growth but instead by a housing market and other ancillary markets that were being fueled by unsustainable valuation increase. When the bubble burst in 2007 and 2008, the damage was quite clear and it's stated that it's no wonder that the economy has been stuck in the doldrums even after the recession supposedly ended in 2009. However, it is clear from this report that the person who wrote it is a pro-Obama person because the "activist" overtones mentioned in the earlier article are completely opposite in this article (Krueger, 2012).

A different article notes that the depth and breadth of the economic fall that occurred in 2007 and 2008 will require more than fleeting or menial efforts to recover from and it should not be assumed or conjectured that anything different shall happen. It is noted that this is true not only in the United States but in the Eurozone and China as well. The article also notes that when one of those three members of the triad (China, EU and America) falter, it affects all three quite clearly even if there is a bit of lag time between the cause and effect or at least the ability to measure a change (Steinbock, 2012).

Another report focuses on the anemic job growth that is present in the United States and looks at the practices of off-shoring and trade in general as being things that affect the output and size of the American job market. Like the earlier report about lack of qualified applicants, this article points heavily to people artificially being discourage from going back to school and collecting the skills that will make them in-demand with the employers that are actually hiring even when overall economic conditions are putrid (Baily & Lawrence, 2004).

This condition is amplified by the fact that the service portion of the United States job economy has not created massive amounts of jobs since the 1990's. Also, manufacturing in the United States is never going to be what it was and the article in question was written in 2004. As such, it seems quite prescient and forward-thinking right now. It is quite easy to see that much of the manufacturing done domestically in the United States is for more complex and high-tech endeavors more often than not and the more simple products and processes are often forced south into Mexico and/or Latin/Central America or over to corners of Asia like China and the like (Baily & Lawrence, 2004).

Indeed, when looking at job losses and gains by sector, some very clear trends come to light. For example, manufacturing is far and away the biggest lower and 2000-2003 was especially traumatic to that sector with more than 800,000 jobs going away per year. However, sectors like Construction, educational/health services, government, other services and leisure did really well. Job losses, when compared between 1990-2000 and 2000-2003 are quite mixed in industries such as wholesale and retail trade, transportation and warehousing, and professional/business services. Many of them did fine in 1990-2000 but have suffered since then. Only the educational/health services, leisure/hospitality, other services and government sectors had a net gain for both time periods. All of the others either had both period being bad or they were one or the other depending on the period (Baily & Lawrence, 2004).

An article written in 2011 lays blame for the Great Recession and its sheer size on the supply-side and other anti-Keynesian policies that were emblemized by the George W. Bush administration and other Presidents before him. The article notes that many people tried to point to Keynesian/FDR policies as being the genesis of the Great Recession and then pointed to the same as delaying the recovery as such plans were implemented by the Obama Administration and the broader Democrat-controlled Congress, which they held in total up until the mid-term elections of 2010 (Niemi & Plante, 2011).

The same article points to the supposedly slow death of the middle class that has been typified by middle-class jobs being the most pervasively scuttled jobs in economic hardships and always the last to come back, assuming they ever come back. This is echoed in other articles in this literature review when they state that while knowledge-sector jobs are scouring the landscape for applicants, service-related job growth is pretty poor and that is eyebrow-raising considering the overall size of the service employment sector in the United States (Niemi & Plante, 2011).

Indeed, the United States two core job classes nowadays are the knowledge sector and service jobs and the fortunes of those two job sectors often parallel in many ways but have diverged in many others and the latter has left less-educated people holding the short end of the stick. Even ostensibly skilled workers are being squeezed out of the knowledge sector and are thus relegated to taking jobs that service-level employees would typically take and this causes an even bigger squeeze on people that are truly unqualified for upper-tier jobs (Niemi & Plante, 2011).

This has led many to say whether the economic conditions that were present as recently as 2012 were indicative of a recession or a recovery ("2012 Recovery," 2012). One major reason for this was noted in an article published the same year and that pertained to the sharp rise in oil prices that was occurring around the world and how that threatened the economic recovery in the United States and other corners of the world. Indeed, factors that have little if anything to do with the recession or what caused it can cause an economy to sputter or even start to retract again. ("Once again," 2012).

Even so, even the real estate industry was cautiously optimistic in 2011 as many saw modest but not stellar growth on the horizon. Even if it was often deemed to be a case of the "the worst is over," many people were more and more optimistic as more time passed between the 2007-2009 recession and the present day. However, real estate barons have to concede and openly admit that the sky-high valuations for properties were never real and should not come back even if that were possible at this point and it is most certainly not (Mirel, 2011).

Even with the new dawning day of economic history in the United States, many people are fixated not just on correction prior mistakes and making sure they never happen again, even if they surely will at some point in time, but also on punishing the alleged violators that led to the economic conditions coming to pass in the first place. Very few economic minds escape this vitriol from at least some corners of the political and economic landscapes. Current Fed Chairmain Ben Bernanke and former Treasury Secretary Timothy Geithner are common modern targets. The predecessors of those two men were in the same boat and no doubt future ones will be as well (Cochran, 2010).

Even economic luminaries like Alan Greenspan seem to be captured in this net due to supposedly "enabling" policies that fed the proverbial fire that exploded in 2007-2009 much like it did in the 1930's during the Great Depression when absolutely no Fed oversight was occurring (Lowry, 2011). Even so, there is widespread thought and credence to the idea that central bank actions can actually create their own problems, which is the cornerstone of theories like the Austrian Business Cycle Theory (ABCT), which states that central bank actions can cause a boom but there is inevitably a bust that comes not long thereafter (Cochran, 2010).

Cochran (2010) states that boom/bust cycles are started by monetary "excesses" which skew the "calculation process" that measures economic activity in a "systemic" way. The theory goes that the creation of money and credit, when coupled with associated reactions with interest rates, skews the entire playing field and measurement process and this makes effectively policy-making next to impossible. The Austrian economic minds refers to this ebb and flow as Cantillion effects. The theory of Cantillion effects states that real spending on what money is spent on varies widely based on when, where and how money enters the affected markets (Cochran, 2010).

An example of how this all manifests itself is when interest rates are far lower than hey should be given actual market conditions and this leads to an overuse of credit and thus the boom/bust cycle is created and continued. This is stated to be the case because the growth induced by such happenstances is not truly organic and part of a real framework but is instead unsustainable so there is only a matter of time before everything blows up and this is what is purported to have happened with the housing market in the United States (Cochran, 2010).

When the market correction happens, and it's only a matter of "when" and not "if" according to Cochran, the market corrects and interest rates skyrocket. This is problematic for loans and projects that were planned and executed on the basis of interest rates remaining low and this can cause financial ruin for forms that were counting on interest rates remaining low. The domino effect of less demand and higher interest costs is a proverbial double-whammy to firms that lose the sweetheart interest rates as well as the demand that ostensibly drove the project into being in the first place (Cochran, 2010).

Chapter IV -- Summary

In the end, it is clear that while the lagging recovery of the United States economy since the Great Recession is due at least in part to the depth and breadth of the economic crash that occurred, it is also clear that some actions and behaviors (or lack thereof) have been counterproductive. There is a lack of continuity and predictability to the United States budget and there seems to be too much of a focus on Keynesian spending when many people, both regular folks and educated professionals, that there is large concern over the amount of the United States debt and a lack of action by many to at least keep the budget of the United States level rather than arcing it ever upward.

However, Keynesian policy, per the literature review, has a time and a place and has been effective in propping up the United States economy in the past so that the private sector can regroup and recover and fill in the void that it usually inhabits. The crash of the housing sector and associated credit markets has certainly had some wide-ranging and very detrimental effects but there have been some positives as well. People are being more reasonable with their money and are being more careful about the large purchases and other major decisions that they make. Savings rates are up and the amount of aggregate credit card debt has fallen as people are becoming less aggressive and/or careless with their spending.

While it is true that these good habits and results will probably fade over time as the Great Recession becomes more of a distant memory, it is reassuring and probably good for the economy to go through this obvious correction in spending habits, government policy and valuation of property that clearly had become inflated. It remains to be seen how this will all manifest itself, but the overall arc is good right now even if it's a bit slow.

Chapter V - Recommendations

The author of this report would offer four main recommendations for economists and politicians that toil and pander regarding the economic growth, or lack thereof, in the United States at this time. The author of this report fully believes that the implementation of all three of these recommendations would open the floodgates of economic activity and would lay waste to the current economic performance metrics that are currently exemplified by the United States economy.

The first recommendation the author of this report would add is to settle on a budget and tax plan for at least the next three or four years and then leave it alone. The ongoing debt ceiling and fiscal cliff issues are not helping the economy at all and there hasn't been a budget passed by both houses of the United States Congress for several years. This needs to stop, and quickly, or businesses are going to continue to sit on their piles of money because they do not know what their regulatory and tax expenses will be for the near horizon. To see this idea and suggestion proven, one can look at two recent points in history, those being the Clinton years and the early to mid-parts of the George W. Bush administration. Regardless of whether one agrees with the policy tasks they did were wise, they generally left tax rates the same and made things predictable for the private sector during that time. As such economic growth during much of their two sets of terms was outstanding.

The second suggestion is to quit raising the budget and spending so much money on stuff the economy does not need. Instead of focusing on core duties and responsibilities like border security, national defense and other things that are ongoing and not optional, there is a wanton amount of waste and inefficiency due to things like overlap, corruption and loopholes. Even spending on things like unemployment extensions and other Social Security Disability should be up for review because while many people need these benefits and should get them, there is rampant abuse and these programs are actually encouraging bad behavior rather than simply being a safety net.

The third suggestion the author of this report would offer is to quit treating businesses like the enemy. Many people slam and pillory the private sector as being a bunch of avaricious gluttons that are only focused on profits and nothing else. However, that mindset is poison for two major reasons. First, businesses have to make a profit to survive and absolutely nothing else matters if a profit cannot be garnered. Second, businesses do not exist to satiate and placate the employees. Employees should not feel entitled or recoil when it's found that their job is up for elimination. Sometimes, job cuts are necessary and keeping people on the payroll that cannot be justified is less than wise.

The author of this report recalls that AIG was threatened and spewed with massive vitriol over retention bonuses that served a legitimate business purpose and were industry-standard for a business encountering what it was going through. However, when Fannie Mae and Freddie Mac did the same precise thing just a few months later, there was not nearly as much vitriol and there was no (illegal) legislation that targeted the bonuses of those workers and this despite the fact that those two GSE's cost the taxpayers billions of dollars every year while AIG was only bailed out that one time and they have since paid the money back. The GSE's have not done so and never will be able to do so.

The point that the author is trying to make is that while there are bad actors in the private sector, most businesses do the right thing and are a net positive for the country and the United States economy and the same precise thing can and should be said for the United States government as well as the state and local governments below it. The major difference is that business is largely beholden to its owners, whether it be stockholders or other ownership structures, but government agencies are obligated to all of the people that pay taxes and it seems that some elected officials seem to forget that.

The fourth suggestion is to not over-regulate in general and not over-react to corporate or other scandals. A good example was Sarbanes-Oxley. While that legislation was certainly needed due to what happened with Enron (and other corporate scandals), there was still a massive amount of overreach that caused a net loss to many businesses that never have and never would behave in a way similar to what happened with Enron. Despite that, their regulatory and compliance costs have skyrocketed due to something that they did not create and would never mimic.

After all, it is clear with the apparent targeting of certain political ideologies by the IRS and EPA as well as some of the silliness that is coming out of the Equal Employment Opportunity Commission regarding the hiring (or not hiring) of felons that can make employers subject to losses if (probably when) the person recidivates and thus makes the employer subject to negligent hire lawsuits or other legal actions by victims who will (rightly) state that such hires should never have happened, it is clear that reality is disconnected from history and that is never a good idea. The lesson that has learned by many but is apparently being ignored or glossed over in this instance is that people that do not learn from history are doomed to repeat it and this is no less true of government regulations and other actions.