While the 2007 recession technically ended in October of 2009, most Americans would be hard pressed to let the technical details of what defines an economic slump get in the way of what everyone sees: we’re still mired in the economic doldrums, two-consecutive quarters of negative growth or not.
And with Congress barely able to agree on a time and place for a presidential speech much alone a series of economic packages to stimulate the housing, consumer, and labor markets, the Federal Reserve has stepped in to do its monetarist best.
After a $787 billion stimulus package, two-rounds of quantitative easing, and a third one called Operation Twist currently in effect, our unemployment rate is 9.1 percent–0.7 points lower than when the recession officially ended. Clearly something isn’t working, and the Federal Reserve toolkit of available fixes is running low.
Figuring out how to heat up the economy first means diagnosing the problem. Republicans in the House believe cutting the national debt and slicing taxes is more or less the silver bullet, but that doesn’t get at what a bevy economists think is the chief antigen to a healthy economy—excessive private debt.
From Barry Ritholtz and Chris Whalen, to Stephen Roach, currently non-executive chairman of Morgan Stanley Asia, and Steve Keen, some form of debt jubilee, or personal debt forgiveness, has been prescribed.
The Federal Reserve Bank of San Francisco is in their corner by virtue of this January report:
A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.
Household debt as a portion of the GDP is at 90 percent, and according to a New York Fed report on debt and credit, 71 percent of that household debt was stuck in mortgage payments. Making matters worse, 22 percent of all residential properties have owners shouldering loans that exceed the market value of their home.
Large amounts of debt means a consumer’s available income goes to making payments on that debt. The unemployment rate is currently too high, and with wages flat, those with a paycheck can’t get a jump on their debt obligations.
Some members of the Federal Reserve have proposed targeting a higher level of inflation (above two-percent annually) to increase the price on goods, thereby cutting into unemployment.
A BusinessWeek article suggested that in theory, the practice could work, but as economist Adam Hersh at the Center For American Progress explained in an interview, wages would have to rise, as well. “Having faster inflation is a textbook strategy for lowering the debt burden because it erodes real value of the debt that is owed,” he said. “But that’s only an effective policy to the extent that wages or incomes are growing faster than inflation.
“If they’re growing at the same pace you’re not lowering the debt burden relative to income. And if income is growing slower, then the debt burden is expanding out of the reach of their incomes.”
He says the only way for wages to rise, and for households to finally have a chance to peel back the debt that’s sagging the economy, is to vie for full employment. For what it’s worth, Christina Romer and Mike Konczal agree.
And this is where liberal economic thinking takes off: if the private sector is unwilling to hire, and it has every right to pursue efficiency curves that keeps it from hemorrhaging more revenue and risking even greater job loss, then the government must step in.
“A job is a job whether it goes to a private sector or government worker,” says Brad Kemp, an economist with Beacon Economics. Federal programs like the expired TANF-ECF, which had sweeping Republican support on the state and local level, paid most of the wage of an unemployed person to work for a company. Workers were given roughly $10 an hour and some quarter of a million otherwise unemployed workers had a job that gave them on the ground training.
He also supports direct tax credits that reward employers for hiring new talent, rather than tax cuts. “What happened when consumer spending started to rise in the 2000s? Imports went up, Kemp said. “Tax cuts for consumers stimulates the global economy but there is no guarantee tax cuts can lead to job growth.”
A federal jobs tax credit on the other hand is a spending incentive that can only be take advantage of if the employer actually hires someone.
Infrastructure projects are also a top recommendation by Kemp and others—not only can they employ many people, but the country could use a steel and concrete makeover. “Bad infrastructure limits growth, “ begins Kemp. “If it takes me one hour to drive five miles to work, do you not think that would inhibit my desire to move that city? If an aging electric grid leads to rolling brown outs, what that not spurn my decision as an employer to start a business in that city?”
Affording these credits and spending projects puts a greater debt burden on this country—and so do tax cuts, without the added benefit of knowing for sure whether those extra dollars will lead to jobs—but as Hirsh explains, interest rates are so low, borrowing the funds to subsidize the stimulus would pay for itself.
As more people are put to work, consumer spending jumps, and as seen in the late 1990s, wages also increased. Suddenly debt is manageable to more households, and increased employment means greater revenue for local, state, and federal governments.
Besides, it’s our tab—out of the $14.3 trillion the U.S. has racked up in debt, Americans are owed $9.8 trillion.
Correction: This article previously ascribed support for debt forgiveness to Barry Ritholtz, which is an inaccurate representation of his views on the matter. We regret the error.