Rebuilding the US economy and sustaining the recovery

Chairman, US Council of Economic Advisers, Executive Office of the President

A. Krueger ©L.Downing/Reuters

As the US emerges from the deepest recession since the Great Depression, it is critical to take steps that will lead not only to recovery, but also to more robust economic growth with rising employment and broadly shared income gains. 

Returning to the pre-crisis state of the economy is not sufficient. The pace of economic growth in the upswing prior to the Great Recession was modest, and the expansion of the 2000s was driven by increasing consumption and wealth from an unsustainable rise in housing prices rather than from rising employment and income; indeed, the share of the population working fell in the US in the years prior to the Great Recession and median family income was stagnant or declining throughout the 2000s. From the start of the decade of the 2000s through November 2007, only 7.4 million jobs were added. Even if job growth had continued at the same pace through 2009, this would have represented the slowest employment growth for a decade in over 60 years (since the Great Depression); the actual record for the decade was much worse, of course, due to the recession that began in December 2007.

By contrast, net US payroll job growth was 22.3 million from 1990 to 2000.

What these data suggest is that the US had a dismal job creation record in the 2000s—even before the Great Recession began.

Poor job growth translated into an increasingly smaller fraction of Americans working. The employment-population ratio increased from 62.9% in 1989 to 64.3% in 1999, and then fell in the recession in the early 2000s and never recovered to its previous high. This share stood at 62.9% in November 2007, precisely where it was in 1989. (Today, after the ravages of the Great Recession, it is 58.4%.)

The 2000s did not have to be so disappointing. The OECD Labour Force survey indicates that many other industrialised nations had robust job growth over the 2000s even after accounting for differences in industry composition. These data suggest that the slow job growth of the 2000s was not an inevitable feature of globalisation or technological change, as some have argued. Instead, structural differences such as lagging educational attainment, increasing inequality, and an expensive and inefficient health care system may have played a role. One large fixed employment cost has been employer-provided health insurance. In the long run, health insurance costs are probably shifted to workers in the form of lower pay, but in the short run health care costs may be borne partially by employers, and unnecessary administrative costs of providing health insurance create a wedge that is likely to lower employment.

These are important lessons to reflect upon as the US recovers from the Great Recession. Though the US is recovering—with 20 consecutive months of private sector job growth—there are still 13.9 million people unemployed. Nearly 5.9 million of those unemployed have been unemployed for 27 weeks or more. To put these Americans back to work, the recovery must be stronger and sustained.

Since taking office, President Obama has been laying the foundations for a stronger economy, both in the short term and long term. When the President took office the economy was losing over 800,000 jobs per month and GDP was contracting at an 8.9% annual rate. The Obama Administration took the necessary steps to break the back of the economic free fall, including implementing the American Recovery and Reinvestment Act (ARRA) and the Financial Stability Plan. Just one quarter after ARRA took effect, the economy began to turn around. The recession officially ended in the middle of 2009, although it has taken nearly four years to return to the level of GDP that was reached before the recession began, and the US still has a very deep hole to dig itself out of in terms of creating jobs and raising middle class incomes.

The US needs to do two things at once: sustain the recovery and return to a fiscally sustainable path for the federal budget. Rather than contradictory, these goals are complementary. If markets and households believe that the US is on a sustainable long-term fiscal path, there is more headroom for supporting the economy in the short term.

As the world economy struggled with shocks from the Japanese earthquake, rising oil prices and financial stresses in the euro zone, President Obama proposed the American Jobs Act to strengthen growth and increase employment in the near term while rebuilding the economy over the longer term. The American Jobs Act would strengthen aggregate demand by extending and expanding the payroll tax cut and Emergency Unemployment Compensation. It also includes US$50 billion in upfront investments for highways, highway safety, transit, passenger rail, and aviation activities, and $10 billion to establish a national infrastructure bank that would direct funding to the most high-value projects. Infrastructure investments produce many benefits to the economy, such as improving safety, increasing land values, reducing travel times, and boosting productivity. The costs of infrastructure investment are quite low at the present time, with real interest rates close to zero and rates of resource utilisation in the construction industry at low levels.

President Obama has tackled structural problems that, if not addressed, could lead to weak employment growth in the future. First is the rising cost of health care. Early in the second year of the Administration, the Affordable Care Act was passed, which will lower the growth of health care spending in both the public and private sectors through the creation of health care exchanges, stronger risk pooling, insurance regulations, and greater transparency, as well as provide health insurance coverage for the vast majority of the uninsured.

Second, President Obama has made improving the quality of education and increasing educational attainment a focus of his Administration. He launched ambitious education reform through Race to the Top. Race to the Top provided $4 billion in grants to states raising standards, measuring performance, and holding education leaders accountable for student gains. The competition sparked widespread reform as states attempted to meet the requirements for competitive grants. The President has proposed a similar competitive grant process for early childhood education and has taken steps to make the funding for the government’s early childhood programme, Head Start, more performance based.

Structural changes in the health care and education systems along with investments in infrastructure and innovation lay the foundations for stronger economic growth and employment and income growth in the future. These actions will build on the recovery already taking place. Since the middle of 2009, the US economy has now grown for nine straight quarters and since February 2010 private employers have added 2.8 million jobs on net. The US recovery has persisted in spite of substantial headwinds that have threatened the world economy, and sustaining and strengthening the recovery remains a paramount goal, even as we work to address longstanding structural and fiscal issues.

US Council of Economic Advisers

See also: 

OECD Labour Force Statistics

American Recovery and Reinvestment Act

American Financial Stability Plan 

American Jobs Act

Affordable Care Act

Race to the Top

Head Start 

©OECD Yearbook 2012




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