Slow USA Econ Recovery Chapter

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 II - Background The economy of the United States has always swung between booms and busts over the course of its existence and that has certainly been true since the Industrial Revolution in the mid-1800's.

Over that time, there have been three very nasty recessions that have reshaped the path of the United States and in all three cases, it took quite a while for the country to snap back. The first of those recessions was the Great Depression in the 1930's. Prior to that point, the Fed and its regulatory and preventative actions did not exist like they do today.

The United States did not truly recover from that economic rough patch in the 1930's and 1940's until the boom of the war industry snapped the United States economy back to life in the early 1940's (Hyman, 2011). The second recession that was exceedingly nasty for the United States was the economic "malaise" of the late 1970's and early 1980's, which came to an end after Ronald Reagan had been in office for much of his first term.

Gas prices and shortage were quite nasty during that time but the economy eventually came back to life in the mid- to late 1980's (PBS, 1979). Even with the 9/11 attacks in 2001 and several other recessions from the early 1980's to the mid-2000's, the economy actually did quite well, at least in terms of GDP and general job growth, during most of that time, with the only real outliers being during the latter part of the George HW Bush administration and the earlier part of the George W.

Bush administration (FactCheck.org, 2012). Those outliers were blown out of the water by the housing and credit market crashes that came starting in 2007. Negative GDP growth and job losses were near-cataclysmic in 2008 and even early 2009 and housing prices fell seismically due to the apparent over-extension of credit and the accompanying over-valuation of houses that is still falling out to this very day in some markets. The market has started to come back but it is nowhere near where it was at its apex in the 1990's and 2000's.

Many people have been foreclosed upon and many more have lost so much equity in their homes that they owe more than the house is currently worth (Luhby, 2012). The focus of this report is the economy's apparent lack of response to the continued and pervasively ongoing efforts to stimulate the economy. Indeed, as of May 2013, the national unemployment rate in the United States actually went up to 7.6% but it's still far from its roughly 10% apex.

Similarly, GDP growth was initially estimate at 2.4% for the first quarter of 2013 but has since been lowered to 1.8% by the Commerce Department. The aggregate level of consumer spending only rose by 2.6% rather than the 3.4% that was initially estimated (Gongloff, 2013). One major complicating factor in all of those metrics, the first two in particular, is that while they are a good indicator for how the economy is doing, they are not always the easiest numbers to parse and analyze. The unemployment rate is an example.

There are actually six dimensions to the unemployment rate, often shortened to U-1, U-2, U-3, and so on respectively. The rate that is reported in most news stories and the one that is noted above is the U-3 rate. It does not include people that have exhausted their unemployment benefits and it also does not count people that have given up. Lastly, it also does not count people that are under-employed.

The latter is indeed accounted for by the U-6 and when those people are factored in, the unemployment rate is seen as being above 10% (BLS, 2013). Economic growth can be misleading as well. It is generally a good sign if the GDP amounts in the United States are going up but economic stimulus and easing programs can artificially inflate what is going on and people who are thinking they see organic economic growth are possibly just seeing growth that has been artificially created by government spending and actions.

Indeed, stimulus bills and the like do indeed cause GDP growth to arc upward (or less downward) but said effects are fleeting and the will fade if organic economic growth does not rise up to replace it when it does indeed fade eventually (Scully, 2009). 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.