current recovery from recession compared with previous recoveries.
Her speech Monday was not a spectacular departure from what she has said in the past. Nor did she break any new ground for those of us who have been following the progress of the economy since the Great Recession plunged us into post 1930s record-breaking territory on a number of fronts. Key among those has been how long it's taking for the unemployment rates (both narrowly and broadly determined) to return to anything that isn't ripping the skin off (and the guts out of) tens of millions of American workers.
But while the speech doesn't say anything particularly new, it's still good to hear from an official source, so join me below the fold and see what she had to say.
In trying to account for why this recovery has been so weak, it is helpful to first consider several important factors that have in the past supported most economic recoveries. By this I don't mean everything that contributes to economic growth, but rather those things that typically play a key role when the U.S. economy is recovering from recession. Think of these as the tailwinds that usually promote a recovery.
The first tailwind I'll mention is fiscal policy. History shows that fiscal policy often helps to support an economic recovery. Some of this fiscal stimulus is automatic, and intended to be. The income loss that individuals and businesses suffer in a recession is partly offset when their tax bills fall as well. Government spending on unemployment benefits and other safety-net programs rises in recessions, helping individuals hurt by the downturn and also supporting consumer spending and the broader economy by replacing lost income. These automatic declines in tax collections and increases in government spending are often supplemented with discretionary fiscal action--tax rate cuts, spending on infrastructure and other goods and services, and extended unemployment benefits. These discretionary fiscal policy actions are typically a plus for growth in the years just after a recession. For example, following the severe 1981-82 recession, discretionary fiscal policy contributed an average of about 1 percentage point per year to real GDP growth over the subsequent three years.
However, discretionary fiscal policy hasn't been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as [the chart above] indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits. [...]
These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you're unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.
So, while the stimulus certainly ameliorated the damage caused by the recession, it wasn't strong enough to kick-start the economy into a real recovery. Given how dreadfully slow progress on the job front has been, there is every possibility that well before it returns to something near the level of health it was at 63 months ago, we will have fallen once again into recession.
Yellen expresses a bit of optimism for faster improvement come 2014 and later. But what's missing in her speech is something spurring faster improvement now and for not falling into this same trap again in the future. Not that the Fed can provide the whole answer. Unlike the cheap money it has been providing banks, a subsidy by another name, it doesn't have the authority to cut checks for average Americans that would boost demand.
Meanwhile, millions of individuals and families continue to suffer from both the acute problems engendered by the Great Recession and from the chronic problems that predate it and were exacerbated by it. All the while, austerity, both the Republican brand and the less onerous but still wrong-headed Democratic brand, remain the main line of attack by Beltway BSers—pundits, politicians and lobbying pitchmen alike.