…because I’m an economist and a mom–that’s why!

Well, Now That That’s Over…

September 20th, 2010 . by economistmom


Or is it?  The National Bureau of Economic Research has finally made it official: the latest economic recession ended well over a year ago–in June 2009.  From a CNN-Money story:

The National Bureau of Economic Research, an independent group of economists, released a statement Monday saying economic data now clearly points to the economy turning higher last summer.

That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.

The NBER acknowledged the risk of double-dip recession in its statement, but said “The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.”

Of course, that doesn’t mean that things are just peachy now.  We’re still in “recovery”–not “recovered”–mode:

The committee that made the finding said it “did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.” Rather, it decided that June was when the economy hit bottom, and that it has been slowly but steadily growing since then.

“Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion,” said the NBER.

…which means there’s still plenty of need for counter-cyclical fiscal “stimulus” and that right now is not yet the right time to reduce the federal deficit.

But that doesn’t mean that any deficit-financed spending or tax cut is justified.  You will hear a lot of economists, including those recently surveyed by CNN-Money in fact, say that the continued weakness in the economy is why all of the Bush tax cuts should at least be temporarily extended.  But that conclusion puts a pretty low bar on the Bush tax cuts:  it says they’re a good idea just because they cost money–in simply moving substantial resources from the government sector to the private sector.  It doesn’t ask how good a job those tax cuts will do in stimulating private-sector economic activity.  It doesn’t ask if there are ways to stimulate the economy even more, for less money.  It doesn’t ask if there are better ways to get money in the hands of people who really need the help the most.  It doesn’t ask if the dangers of this deficit financing of these particular tax cuts becoming permanent (and hence eventually a bad thing for our economy) are too large.

As CBO Director Doug Elmendorf recently explained (emphasis added):

There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.

If taxes were cut permanently or spending increased permanently, that would worsen the fiscal outlook. Even if changes were temporary, the additional debt would weigh on the budget and the economy in the future.

Achieving both stimulus and sustainability would require a combination of policies: changes in taxes and spending that would widen the deficit now, but reduce it relative to current baseline projections after a few years. Developing such a combination would be feasible but not easy.

I think the only justification for supporting any extension of the Bush tax cuts (and turning them into the magically-better “Obama tax cuts”) is the “a bird in the hand” political argument.  If we could more objectively analyze any possible economic benefits of the Bush tax cuts, just about any benefit could be made greater (and/or at lower cost) if we substituted an alternative fiscal policy.

But I guess it’s just our human nature:  it’s typically easier to stay in a bad relationship rather than make the hard but obviously-better choice to get out of it.

4 Responses to “Well, Now That That’s Over…”

  1. comment number 1 by: AMTbuff

    The most stimulative policy right now wouldn’t cost anything: Break all entitlement promises. If you don’t want to retire poor, either save for it or don’t retire. If you choose to or have to live on government money, accept that your living standard will be low.

    This policy change would fire up the economy like nothing else ever has.

  2. comment number 2 by: AMTbuff

    In Gene Steuerle’s latest Government We Deserve newsletter, he writes, in part: “If policymakers could relieve some of this demographic pressure—particularly by avoiding some of the projected drop in employment rates among those in late middle age and older—then revenues rise without tax rate hikes, and those higher revenues support additional benefits at any tax rate. Such a win/win scenario should be easy for both Republicans and Democrats to embrace.”

    Scaring baby boomers into delaying retirement would be highly beneficial to the economy and to the government. The best way to accomplish this is to announce officially and loudly that no one should bank on the continuation of government benefits at the current level. We should put a “May End Abruptly” warning label on these benefits. That should persuade many people to delay retirement, adding needed tax revenue.

    Progressives will resist this approach for political reasons. They WANT voters to perceive government as a reliable provider of benefits. Only the actual arrival of a crash in the market for US government debt will convince progressives otherwise, but by then it will be too late to save anything but a truly minimal safety net. Too many people will have made a difficult-to-reverse decision to retire.

    As usual, Gene is very much on the right track.

  3. comment number 3 by: BillSmith

    There seems to be a lack of jobs for these baby boomers that you want to have put off retirement.

  4. comment number 4 by: AMTbuff

    I’m talking about the currently employed remaining at work rather than retiring. Some of that is happening anyway after 401ks were halved in the bear market.