Republicans have themselves to blame for the slow economy, study says ~ Economy News

Tuesday, August 16, 2016

Republicans have themselves to blame for the slow economy, study says


Hillary Clinton will set out her economic policy later today.
 Hillary Clinton will set out her economic policy later in Michigan on Thursday. Photograph: ddp USA/Rex/Shutterstock

The US’s slow recovery from the 2008 recession is due to Republican policies on the local, state and federal level, according to a new study published by the left-leaning Economic Policy Institute (EPI).


The new report comes as the slow pace of recovery has emerged as a key battleground between Republican candidate Donald Trump and his Democratic rival Hillary Clinton, who will set out her economic policy on Thursday.
The EPI report blames the lackluster pace of recovery on Republican-led budget cuts in 2011 following the row over the US debt ceiling, the unwillingness of local officials to spend money when Republicans in Congress were advocating cuts in spending, and the refusal to expand Medicaid in 19 states.
The report comes as the Republican party once again calls for the reining in of government spending and reductions in the deficit.
“Given the degree of damage inflicted by the Great Recession and the restricted ability of monetary policy to aid recovery, historically expansionary fiscal policy was required to return the US economy to full health,” writes Josh Bivens, research and policy director at EPI.
“But this government spending not only failed to rise fast enough to spur a rapid recovery, it outright contracted, and this policy choice fully explains why the economy is only partially recovered from the Great Recession a full seven years after its official end.”
This economic recovery has been the slowest over the past four business cycles. For example, the employment recovery from the trough of the Great Recession to its pre-recession peak took 51 months. Following the recession in the 1980s, employment recovery took 11 months. In the early 1990s it took 23 months, and in the early 2000s it took 39 months.
The US government would have had to spend an additional $1tn in 2015 alone to match the spending that followed the 1980s recession, Bivens said. While such spending might run up the US deficit – something Republicans in Congress are opposed to – it would also have led to “several years of full employment” and the Federal Reserve increasing interest rates.
There are few ways the government can help speed up economic recovery after a recession. One way is to cut interest rates to help increase borrowing, which should lead to increased spending. Similarly, to increase spending by consumers, the US government would typically cut taxes, essentially putting more money in people’s pockets.
The ability of the US government has been slightly limited this time around – especially when it comes to cutting the federal interest rates, which have been historically low.

Interest rates

At the time of the 1980s recession the federal fund interest rate was at 9.3%, whereas in the first quarter of 2009 it was 0.18%.
“This means that there was much more room to move down the federal funds rates following the 1982 trough compared to the 2009 trough,” Bivens wrote.
Low interest rates combined with the potential of another recession are a concern for the US Federal Reserve. Fed chair Janet Yellen had previously said that the central bank has few tools to deal with another recession if it were to occur.


Bivens argues that the federal government should have increased aid to state and local governments following the recession and that the Obama administration should have been more outspoken about its opposition to the fiscal austerity pushed by Republicans.
The Obama administration “could have made a louder and more consistent case that the slow recovery had concrete, identifiable roots in decisions made by the Congress,” Bivens wrote. “Had the Obama administration made such a powerful case for why austerity was hampering growth, it could have educated the public and potentially helped build support for more sensible policy the next time the United States faces a recession.”
The EPI report was published hours before Clinton was scheduled to deliver her speech on the economy in Warren, Michigan. Warren is just slightly north of Detroit, where Trump delivered his economy speech earlier this week.
In his speech, Trump said that the Obama-Clinton agenda had led to the loss of jobs and put undue restrictions on US businesses, making it difficult for them to compete in the global economy.