The Economic Crisis and the U.S. Policy Response: Just Right, Too Little or Too Much?

The U.S. policy response to the ongoing economic crisis has been a hot topic for discussion in the recent years. On June 2, the New Rules for Global Finance, Heinrich Böll Stiftung North America and the Program on American and the Global Economy (PAGE) hosted a public forum to discuss the varying perspectives on the effectiveness of the U.S.  response. The panel was moderated by Thomas Palley, Bernard L. Schwartz Economic Growth Fellow at the New America Foundation.

Ron Blackwell, chief economist at the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), opened the discussion by stressing that “we are dealing with the effects of AN economic crisis that is unique in the post-World War II experience in magnitude and that is similar in nature only to the last two recessions.  .” He pointed to the prolonged unemployment and jobless recovery as huge problems and stressed that the current U.S. policy response is inadequate. Blackwell argued that the recent crisis is different from any prior ones because it is not a policy-induced recession; rather, it is a very damaging response to fundamental imbalances, “imbalances in the U.S. external accounts, imbalances between the financial sector and the real economy, and imbalances between workers and employers.” Thus, he emphasized that this “unique” crisis “requires a different kind of response than anything we have known in the past.” Regarding the U.S. reaction, Blackwell commented that the Obama administration came with the right framework- rescue & recover, rebalance, rebuild, and reform- but has not delivered the policies or results to support it. He stressed that what the country needs is not another stimulus program but a sustained public investment program, such as investment in education and infrastructure, to rebuild the basis for a competitive, sustainable recovery.

Uri Dadush, senior associate and director of the International Economics Program at the Carnegie Endowment for International Peace, shared an international perspective on the U.S. response to the crisis.  He pointed out that the U.S output decline was rather shallow compared to other countries considering that the United States was “the epicenter of the crisis.” Dadush suggested that this was due to the aggressive U.S. policy response- the large fiscal stimulus package and the cut in interest rates- as well as the “safe haven” effect during the crisis. People did not lose confidence in the dollar, as seen by the real dollar appreciation in the midst of the crisis. Dadush emphasized, however, that problems persist for the country as unemployment remains high compared to other developed countries and a fiscal crisis is looming with its huge government debt. He also warned that the reliance on emerging markets is not the ultimate solution as they are overheating and their help cannot do much more in the long-run. Dadush concluded that, “it is difficult to say, looking at it from the international perspective, that the United States did not spend enough.” Instead, he emphasized that there is a need for a more targeted intervention and a medium-term fiscal framework to reduce the deficit. He also noted that there is a need to understand why the unemployment rate is so high despite the relatively modest decline in output He added that there should be less reliance on monetary policy for recovery, as long periods of low interest rate have resulted in risky behavior in the past. 

On the other hand, Michael Lind, policy director of New America Foundation’s Economic Growth Program, focused on the domestic aspects of the issue by stressing that “the U.S. is not a unitary state.” He pointed to the disconnected policy response at the state and federal level, particularly actions at the state level that offset the stimulus program at the federal level. Lind also argued that there are emerging inequalities in the labor market. He added that there is a polarized future for the United States as the fastest growth is in low-skill jobs, the second fastest in high-skill jobs while the medium-skill jobs are disappearing. Regarding the U.S. policy response, Lind commented that, “we need to think about this, not in terms of a policy that can be done successfully with existing government structure, but an opportunity for structural reform.” He proposed the “Regan-Nixon plan,” whereby the United States will completely nationalize the current hybrid federal-state social insurance program and allow some degree of general revenue sharing. He emphasized that such a change in the structural aspect of the federal-state system will not only have enormous stabilizing effect now, “but will also avert or cushion and ameliorate the dangers of future crises.”

Prakash Loungani, advisor in the Research Department of the International Monetary Fund, called the United States the epicenter of the unemployment impact. According to his findings, the United States accounted for half the increase in global unemployment over the course of the crisis. He stressed that the primary reason for the rise in unemployment was the drop in demand.  Although he agreed with Dadush that the correlation was not perfect, Loungani stressed that the fall in demand was a major push factor for firms to lay off workers. As for the policy response, he noted that the Federal Reserve and the Administration receives a grade of A, “since there was some chance to end up in great depression but we avoided that so in that sense policymakers did well.”  Loungani was also optimistic about the fiscal response, especially the coordinated efforts of the G-20 countries to provide fiscal stimulus. He concluded that “with hindsight, we might have provided more robust monetary and fiscal policy response…that might have helped some of the cyclical unemployment from becoming entrenched and becoming more long-term in nature.” He pointed to the lags in the impact of housing market policies and the difficulty of further maintaining the unemployment insurance benefits as some of the challenges ahead for U.S. policymakers.

In closing remarks, Palley noted that “too little of the right stuff” has been done. He warned that enormous human tragedy is unfolding in the country and that the policy challenge has not been met because the U.S. has gone with the “policy as usual.” Palley echoed Ron Blackwell’s words that this recession is different and added “policy as usual is never going to work because the system is broken.” He referred to the metaphor of “pump priming,” saying that pump priming will work only if there is water in the well but if the well is dry, which is the current case, then there is a need to drill a new well. On this note, Palley concluded that “we need to rebuild the system and we are not doing that.” He warned that, if this continues, the country will face a long future of stagnation, human suffering, and even massive political tragedy.

By: Hyun Kyong Lee

Kent Hughes, Director, Program on America and the Global Economy