Can the Fed Stimulate Growth or Only Inflation?

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden.”

Many economists, myself included, believe that a more aggressive Federal Reserve policy is needed to turn the economy around. Additional fiscal stimulus would also help. As the chairman of the Federal Reserve Board, Ben Bernanke put it at a Nov. 2 news conference, “It would be helpful if we could get assistance from some other parts of the government to work with us to create jobs.”

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Perspectives from expert contributors.

However, such assistance will not be coming. President Obama’s jobs package has been blocked by Republicans in Congress, and the order of the day is fiscal tightening, with the Joint Select Committee on Deficit Reduction poised to offer recommendations for $1.5 trillion in additional deficit reduction by Nov. 23.

Perspectives from expert contributors.

With fiscal stimulus off the table, monetary stimulus is all that is available. But the Republican view is that monetary policy is incapable of stimulating real growth – that it will stimulate only inflation. This view is regularly enforced by The Wall Street Journal editorial page, which establishes the ideological line for Republicans on Fed policy.

In an editorial on Feb. 29, 2008, The Journal said it was certain that higher inflation was on the way, calling it the “Bernanke reinflation.” An editorial on June 9, 2008, warned that easy money and Keynesian stimulus “is taking us down the road to stagflation.” On Feb. 6, 2009, the Journal editorial writer George Melloan said the inevitable result of economic stimulus would be inflation. On June 10, 2009, the economist Arthur Laffer wrote on the Journal editorial page that the increase in the Fed’s monetary base was “a surefire recipe for inflation and higher interest rates.”

Echoing the party line, Representative Paul Ryan of Wisconsin, in a New York Times op-ed article on Feb. 14, 2009, said it was a virtual certainty that 1970s-style stagflation was coming back. In The New York Times on May 4, 2009, the conservative economist Allan Meltzer wrote that enormous budget deficits, rapid growth in the money supply and a sustained currency devaluation were “harbingers of inflation.”

More than two years later, none of those predictions has come to pass. According to the Federal Reserve Bank of Cleveland, inflationary expectations have been falling for years and continue to fall. Indeed, recent reports from Reuters and CNNMoney found that deflation – falling prices – is a growing problem.

Although the anticipated inflation rate is falling and the “risk premium” — the difference between a bond that doesn’t adjust for inflation and one that does, in the same maturity — has scarcely changed, conservatives continue to warn that inflation is right around the corner, especially if the Fed were to adopt a new operating procedure called nominal gross domestic product targeting.

This is an idea supported by Christina Romer of the University of California, Berkeley, economists at Goldman Sachs and others. The idea is to permit a period of catch-up inflation to get nominal G.D.P. back to its prerecession trend, which would increase incomes, employment and household balance sheets.

But conservatives want nothing to do with N.G.D.P. targeting. Amity Shlaes, a columnist with Bloomberg News and a former Wall Street Journal editorial writer, denounced the idea in a Nov. 2 column, calling it “a license to inflate.”

Her view is that if a recession causes growth to fall, unemployment to rise and home prices to crash, people should just suck it up and learn to live with it. Allowing prices to rise from wherever they are, even if there has been a deflation that caused them to fall, opens the door to stagflation and even hyperinflation. It’s a risk too great to take. The risk of continuing the status quo is, apparently, nothing to be concerned about.

It’s tiresome to read such rationalizations for doing nothing about the second-greatest economic crisis in our history, especially from someone like Ms. Shlaes, who is well versed in the history of the Great Depression.

Then, too, there were those just like her, like Henry Hazlitt, an editorial writer for The New York Times, and Benjamin M. Anderson, an economist with Chase National Bank, who also said people should just suck it up, that unemployment was only caused by excessive wages and greedy workers and that inflation was a cure worse than the disease, even as the price level fell 25 percent from 1929 to 1933.

With fiscal stimulus off the table and Republicans gambling that continued economic stagnation will hurt Democrats more than them, the Federal Reserve is the only institution with the freedom of action and power to stimulate growth. But it is constrained by conservatives who charge that it is fostering inflation whenever it tries to provide monetary stimulus.

The fact that conservatives have consistently been wrong about this for the last three years has done nothing to diminish their confidence. They are like the French Bourbons, who learned nothing and forgot nothing.

Of course, no one wants to go back to the 1970s, when we had both rising inflation and rising unemployment. But the risk of inflation is now as low as it’s been since the 1950s, while slow growth and high unemployment impose a crushing burden on a huge portion of the population. If the Fed believes it can help, it has a responsibility to do so.

The Lasting Financial Impact of a Layoff

Losing a job you wanted to keep is never a good thing. But for those who lost their jobs during the Great Recession, the long-term consequences will probably be very significant.

According to an economic analysis by the Hamilton Project, a research group in Washington, those laid off from long-term jobs between 2007 and 2009 are likely to lose a total of $774 billion in earnings over the next 25 years, even if they get new jobs.

The analysis of Census Bureau data, conducted by Michael Greenstone and Adam Looney, looks at how the seven million workers who lost jobs they had held for three years or more at the time of the layoff fared in the two years following the job loss.

The graph below shows all workers who lost their job for economic reasons during the worst seven months of the recession and how they have fared since the job loss.

Including those who have not yet found work as well as those who did find new jobs, the average earnings of the group were barely half what they were before the workers lost their jobs, falling from $43,700 before to $23,000 two years later. The income numbers do not include unemployment benefits.

Focusing just on those who were able to find new jobs, the study found they were earning an average of 17 percent less than they earned in their previous posts.

Mr. Greenstone and Mr. Looney based their calculations of future losses on research conducted by Steven J. Davis, an economist at the Booth School of Business at the University of Chicago, and Till von Wachter, an economist at Columbia University, which found that workers who lose their jobs during recessions lose an average of $112,100 over their careers.

Mr. Greenstone, an economist at the Massachusetts Institute of Technology, said many of the displaced workers either have no college degrees or have skills that are rapidly being outdated, and therefore need education to get back to work in jobs that will match their prior incomes. The sobering data, he said, “highlights the importance of trying to identify training programs that can help this set of workers so they don’t lose that money.”

This post has been revised to reflect the following correction:

Correction: November 4, 2011

An earlier version of this post misstated the period examined in arriving at an estimate that laid-off workers are likely to lose a total of $774 billion in earnings over the next 25 years. It involves those laid off from 2007 to 2009, not between October 2008 and April 2009.

Back to Where We Began. Finally.

CATHERINE RAMPELL

Dollars to doughnuts.

The American economy has finally reached the size it was before the recession began four years ago, according to the latest gross domestic product report from the Bureau of Economic Analysis.

Dollars to doughnuts.

That may sound like good news, but it’s long overdue, and frankly not good enough. If the economy were functioning normally, it would be significantly greater today than it was before the recession began.

Here’s a look at the level of gross domestic product over the last decade:

It has taken 15 quarters for the economy to merely recover the ground lost to the recession. That is significantly longer than in every other recession/recovery period since World War II. In the previous 10 recessions, the average number of quarters it took to return to the prerecession peak was 5.2, with a high of 8 quarters after the recession in the 1970s.

Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and Vice President Joe Biden’s former economic adviser, has written up some additional thoughts on the significance of these numbers. He observes:

[R]egaining the peak is just a proximate goal. What we’ve really lost here is the trillions in output between potential GDP (how the economy would have done absent the recession) and actual GDP. That’s the actual cost of the downturn—the output, jobs, incomes, opportunities, even careers, that were lost in the Great Recession.

The Recession in Pink and Blue

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Measured in terms of absolute job loss, men bore the brunt of the Great Recession, hence the term “mancession.” On the other hand, men have fared better than women in regaining jobs during the slight rebound sometimes called the recovery.

Today’s Economist

Perspectives from expert contributors.

Interesting comparison, but gender differences in economic hardship reach beyond employment statistics.

Perspectives from expert contributors.

Many people – even those who live alone – share a portion of their earnings or devote unpaid hours of work to family members, including children and others who are dependent as result of age, sickness, disability or unemployment. Measures of economic hardship should take responsibility for dependents into account.

Women tend to be more vulnerable in this respect than men, primarily because they are more likely to take both financial and direct responsibility for the care of children.

In 2010, according to Census data, about 23 percent of children under the age of 18 lived with mothers but not fathers, about 3 percent with fathers but not mothers and 4 percent with neither parent. In 2007 (the latest year for which data are available), slightly more than half of all custodial parents had formal child support agreements or awards, and less than half of those received the full amount they were due.

Even mothers receiving support from fathers tend to take more responsibility for meeting family needs, intensifying the experience of economic insecurity.

A recent report issued by the Institute for Women’s Policy Research assessed some of the most stressful consequences of a high unemployment rate, based on a nationwide telephone survey conducted last fall in conjunction with the Rockefeller Survey of Economic Security.

The report emphasizes the effects of unemployment on families rather than individuals. More than one-third of respondents reported that they or someone else in their household experienced unemployment during the previous two years. The percentage reached almost one-half for black and Hispanic respondents, and more than half for single mothers.

Unemployment made daily life more difficult for almost everyone touched by it. Still, the gender differences are striking, even among married couples.

Married mothers reported that they were more likely to cut back on household spending than married fathers (80 percent, compared with 66 percent). There was also a noticeable, though not statistically significant, difference between the percentages of married mothers and fathers who reported problems paying their rent or mortgage (31 percent, compared with 26 percent).

Health care anxieties were intense: married mothers were more likely than married fathers to report that they had trouble getting or paying for medical care for themselves or family (34 percent, compared with 17 percent) and that they were worried about the possibility that their employer would cut back health care coverage or increase its costs (43 percent, compared with 34 percent).

Whether single or married, mothers are more directly affected than fathers by cutbacks in public child care provisions resulting from state budget shortfalls and the withdrawal of federal stimulus funds. A new report from the National Women’s Law Center estimates that families in 37 states are worse off under one or more key child care policies in 2011 than they were in 2010.

This emerging pattern of economic insecurity could affect the size and shape of the gender gap in voter preferences. Red may be the Republican color, but over all, pink tilts Democratic.

According to exit polls, unmarried women have typically given more support to Democratic candidates than have married women.

In hard times, however, this “marriage gap” may diminish.

Fewer Births in a Bad Economy

American birth rates have fallen noticeably in the last few years, a trend that seems to be tied to the poor economy, according to a new analysis from the Pew Research Center.

There were a record number of births just as the United States was falling into recession in 2007, when 4,316,233 babies were born. Since then, the number of births has fallen, with provisional data provided by Pew indicating that births totaled about 4,007,000 last year.

CATHERINE RAMPELL

Dollars to doughnuts.

As you can see from the chart above, the birth rate — that is, the number of births per thousand women ages 15 to 44 — uncannily tracked declining incomes since the recession began. The connection between economic conditions and birth rates also generally held true at the state level.

Dollars to doughnuts.

States experiencing the largest economic declines in 2007 and 2008, like Florida, were most likely to experience relatively large fertility declines from 2008 to 2009, the analysis finds. States with relatively minor economic declines on the other hand were likely to experience relatively small decreases in the birth rate.

In fact, North Dakota, which had one of the country’s lowest unemployment rates in 2008 (3.1 percent) was the only state to see its birth rate increase from 2008 to 2009 (by 0.7 percent).

Birth rate changes varied by demographic group, with Hispanics having the biggest fertility decline from 2008 to 2009 of 5.9 percent. Whites, by contrast, had a 1.6 percent drop in their birth rate. Hispanics still have much higher fertility rates than non-Hispanics, but their fertility rate of 93.3 births per 1,000 women of child-bearing age was at its lowest rate in a decade.

Birth rates fell mostly among younger women and actually rose among older women. That may indicate that cultural factors are at play here as well, and that many people are merely delaying having children as opposed to opting out of parenthood (or having additional children) permanently.

“The recession is more strongly associated with fertility declines among younger women, who presumably have the luxury of postponing fertility until better economic times prevail,” the report says, citing survey data Pew has collected separately. “Conversely, older women are less likely to say that they have postponed fertility due to economic declines. They are the only age group that has shown consistent, if not rising, fertility in recent years.”

The decline in housing prices in particular may have had a strong effect on families’ decisions to have children. A new working paper by economists at the University of Maryland finds that short-term decreases in house prices typically lead to an decline in births among people who own their own homes, and an increase in births among people who don’t.

Behind a Surprising Income Trend

Anyone with detailed knowledge of the annual Census Bureau data on household income may be surprised by the new study Robert Pear describes in today’s Times. From the article:

In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found.

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

DAVID LEONHARDT

Thoughts on the economic scene.

The annual Census data, which is better known than the monthly data that forms the basis of the study, presents a somewhat different picture. It shows that inflation-adjusted median income fell 3.6 percent from 2007 to 2008, more sharply than in any year since. From 2008 to 2010 — a two-year period — income fell 2.9 percent.

Thoughts on the economic scene.

What explains the difference between the two surveys?

For one thing, the monthly data (which goes through June of this year) is more current than the annual data (which ends in 2010) and reflects the economy’s continued weakness.

But there is also a second, more surprising reason for the difference: The annual data may be less reliable in some ways than the monthly data.

The authors of the study, Gordon W. Green Jr. and John F. Coder, point out that people are asked about their prior year’s income a few months into the next year. If the economy has weakened during the window between the end of the year and the survey date, some respondents may incorrectly describe their income from their previous year. Their answers will be affected by the economy’s deterioration, and they will tell the surveyor that they made less the previous year than they actually did.

A similar dynamic happens in surveys about health insurance. When people are asked about their insurance status from the previous year, they sometimes misunderstand and instead describe the coverage they have at the time of the survey.

You can see how this would affect the Census income survey, given that the economy was weakening so much in 2009. When asked about their 2008 income, some instead may have described their 2009 income.

In an e-mail to Mr. Pear, the two researchers offered more detail:

In household surveys, respondents are often asked to report events retrospectively for some given time period. When a respondent forgets the exact dates for a sequence of events, this often results in a known survey bias called “telescoping” in which the reporting of the events is telescoped either forward or backward.

The reference periods between the Census Bureau’s annual estimates of income and our monthly estimates of income are quite different. The Census Bureau’s survey is conducted in February, March and April of a given year and respondents are asked to report their income during the previous calendar year. The reference period for the monthly estimates is the 12-month period immediately prior to when the question is asked. Thus, the Census Bureau’s approach requires people to recollect events over a longer reference period.

We think that a telescoping problem may explain the discrepancy between the Census Bureau’s reporting of annual changes in household income between 2007 and 2008 and our monthly estimates. The Census Bureau reports a sharp drop (3.6%) in the annual amount of median household income over this time period whereas the monthly estimates are relatively flat.

Between January 2007 and the Spring of 2009 (when the Census Bureau collected its annual income estimates for 2008), the unemployment rate (seasonally adjusted) increased dramatically. The unemployment rate was in Jan. ’07 was 4.6%, in Jan. ’08 was 5.0%, in Dec ’08 (the end of calendar year reference period) was 7.3%, and continued to rise into the Spring of 2009 when the Census Bureau conducted its survey: Feb ’09 (8.2%), Mar. ’09 (8.6%), and Apr. ’09 (8.9%)

Now, if some of the respondents to the Census Bureau’s survey in the Spring of 2009 erroneously “telescoped” their current unemployment experience back to the previous year’s calendar income, this could have resulted in a calendar year 2008 estimate for income that was too low, hence producing the 3.6% decline in household income between 2007 and 2008 in the Census Bureau’s estimates. The monthly estimates do not have this telescoping problem to the same degree because the reference period is the 12 months immediately prior to interview and the data are collected in real time. This could explain why the Census Bureau estimates are different than the monthly estimates over this time period.

Who Lost Work During the Great Recession?

Casey B. Mulligan is an economics professor at the University of Chicago.

Young people have seen their work hours drop the most during this recession, while the elderly are actually working more than they did before.

Today’s Economist

Perspectives from expert contributors.

Using data from the Census Bureau’s Household Survey via the National Bureau of Economic Research, I calculated the average hours worked by age for 2007 (people not working during the week of the survey count as zero hours worked) and then again for 2010. The chart below displays each age group’s percentage change from 2007 to 2010. For example, the chart shows that the average 16-year-old in 2010 worked 40 percent fewer hours than the average 16-year-old did in 2007.

Perspectives from expert contributors.

We all know that hours worked in 2010 were considerably fewer than they were before the recession began, which the chart shows: most of the age groups have a negative percentage change.

But the chart also shows that labor losses lessen with age and are positive for a number of age groups. In percentage terms, work hours fell the most for teenagers, reflecting the high teenage unemployment rate. After the teenagers, work hours fell the most for the age groups 20 to 29. Work-hours losses for groups in their 30s and 40s ranged 5 to 11 percent. Work hours also fell for age groups 50 to 59, but typically less in percentage terms than for the age groups aged less than 50.

As I noted a few weeks ago, average work hours actually increased for the oldest age groups.

Seniority layoff practices would tend to reduce hours worked most for young people because, naturally, they tend to be employers’ more recent hires. You might think it would make sense for employers to retain their most experienced workers, but downsizing employers tend to offer and encourage early retirement to people in their 50s and early 60s, who are paid more than recent hires and are starting to think about leaving the workplace.

Yet the chart does not show especially large declines in hours for those age groups (nor can seniority practices by themselves explain why the elderly end up working more).

Of course, an employer that shuts down does not lay off based on seniority but lays off everyone.

Another possibility is that the labor market distinguishes, at least in a rough way, among workers according to their willingness to work, and that the stock market and housing market crashes have especially stimulated older people to work more. (Young people, on the other hand, had fewer assets before the recession, so a decline in asset prices has little direct impact on them.) This effect tends to increase with age because the propensity to own assets for current needs and future retirement also increases with age.

To the extent that minimum wages reduce employment of people who would otherwise earn a wage less than the minimum, the minimum wage increases of 2007, 2008 and 2009 may be another factor, because propensity to earn near the minimum wage tends to decline with age (although that propensity is not particularly low for the elderly, who do not have work-hours losses on average).

It is also possible that the ability to efficiently find a new job in a tough labor market is a skill, and people tend to accumulate that skill with age.

Economists are still digesting the labor market data from the Great Recession, but for now it appears that getting back to the pre-recession labor market especially requires creating jobs for young people.

Recovering From a Balance-Sheet Recession

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Unprecedented volatility on global capital markets and a sharp correction in global equity prices are warning signs that the United States, Europe and Japan are teetering on the brink of a double-dip recession.

Today’s Economist

Perspectives from expert contributors.

In the United States, growth in the first half of the year was far slower than predicted, and forecasts for the full year have been marked down. Even if the economy does not slip back into recession, the jobs crisis will persist, because growth will be barely enough to absorb the flow of new entrants into the labor force and certainly not enough to make a significant dent in the unemployment rate.

Perspectives from expert contributors.

To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand brought on by the 2008 financial crisis that burst the debt-financed housing and spending boom preceding it.

This boom displayed all of the features of a major financial crisis in the making — asset price inflation, rising leverage, a large current account deficit and slowing growth. And the recession that followed had all of the features of what Richard Koo called a “balance-sheet” recession — a sharp decline in output and employment caused by a collapse of demand resulting from vast wealth destruction and painful de-leveraging by the private sector.

The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning.

Real per-capita net worth in the United States is back at its 1999 level. The real per-capita value of housing equity has fallen to its 1978 level, and housing prices are still slipping in many parts of the country.

Household debt has come down to about 115 percent of disposable income, largely as a result of foreclosures, 15 percentage points below its peak of 130 percent in 2007 but significantly higher than its 1970-2000 average of 75 percent. Household saving has risen to about 5 percent of disposable income, far above the 2005 low of 1.2 percent but far short of the 1970-2000 average of 8 percent.

Consumption is the major driver of aggregate demand in the United States economy, and since early 2008 it has grown at an average rate of 0.5 percent in real terms. Not since before World War II has consumption growth been this weak for such an extended period.

Despite misleading claims by Republican members of Congress and by Republican candidates on the presidential campaign trail that the size of government, regulation and excessive taxation have caused the jobs problem, business surveys repeatedly have identified weak demand as the primary constraint on job creation.

As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.” And the majority of economists agree on this diagnosis. They also agree that the recovery from a balance-sheet recession can be agonizingly long, with significantly slower growth and a significantly higher unemployment rate for at least a decade.

Recent data indicate that the United States is on such a course, and many economists are now drawing comparisons between it and Japan during the two “lost decades” following Japan’s 1989-90 financial crisis and ensuing balance-sheet recession.

A recent study by the economist Robert Gordon confirmed that the shortfall in private-sector demand, especially the demand for consumer services, residential and commercial construction, and consumer durables, is the primary cause of shortfalls in production and jobs.

He also found that strong net exports, in response to growing aggregate demand abroad, has reduced the jobs gap by about one million jobs, but these gains have been offset by cutbacks in domestic spending, including spending by state and local governments.

In other recoveries during the last 50 years, public-sector employment increased. This time it is falling: during the last year the private sector added 1.8 million jobs while the public sector cut 550,000.

What should policy makers do to combat the large and lingering job losses that result from a financial crisis and balance-sheet recession? Mr. Koo, whose book on Japan’s experience should be required reading for members of Congress, showed that when the private sector is curtailing spending, fiscal stimulus to increase growth and reduce unemployment is the most effective way to reduce the private-sector debt overhang choking private spending.

When the Japanese government tried fiscal consolidation to slow the growth of government debt in response to International Monetary Fund advice in 1997, the results were economic contraction and an increase in the government deficit. In contrast, when the Japanese government increased government spending, the pace of recovery strengthened and the deficit as a share of gross domestic product declined.

The credit rating agencies gave Japan a lower credit rating than Botswana, but this had no impact on the yield on Japanese government bonds. Contrary to the rating “experts,” investors were worried about a prolonged stagnation, not about the ability of Japan’s government to roll over its debt — and they were willing to buy this debt with their growing savings surplus. (Richard Koo, “U.S. Credit Rating Finally Downgraded,” Nomura Equity Research Report, Aug. 9, 2011)

Investors have had a similar response to the downgrade of United States government debt by Standard & Poor’s. To investors, the downgrade signaled the possibility of premature austerity and heightened the risk of a double-dip recession, and this drove the yield on 10-year government debt to levels not seen since the 1950s.

The market understands that the most important driver of the fiscal deficit in the short to medium run is weak tax revenues, reflecting slow growth and high unemployment, and that additional fiscal measures to put people back to work are the most effective way to reduce the deficit.

Every one percentage point of growth adds about $2.5 trillion in government revenue. An extra percentage point of growth over the next five years would do more to reduce the deficit during that period than any of the spending cuts currently under discussion. And faster growth would make it easier for the private sector to reduce its debt burden.

But what about the growth of public-sector debt that would result from more fiscal stimulus? Some economists worry that the growing government debt will itself become a constraint on growth. But that certainly is not the case now — with weak private-sector demand and a huge output gap, spending and borrowing by the government are not crowding out spending and borrowing by the private sector.

What about the fact that by some estimates the debt-to-gross domestic product ratio is approaching the 90 percent threshold identified by Carmen Reinhart and Kenneth Rogoff as likely to reduce growth by a percentage point a year? As Robert Shiller has pointed out, the causality between this ratio and growth runs in reverse when the economy has lots of slack as it has now.

Under these conditions, slow growth leads to a higher debt ratio, not vice versa.

The United States government can currently borrow funds and repay less than it borrows in constant dollars. Surely there are many job-creating investment projects in education, research and infrastructure that would earn a higher rate of return. I argued in favor of more government spending on such projects and the introduction of a capital budget in my previous Economix post.

Even Professor Rogoff acknowledged in a recent interview that he would support more government spending on infrastructure, and there is widespread bipartisan support for infrastructure investment in the Congress and in the business and labor communities.

Unfortunately, the current extension of the highway trust fund and surface transportation bill expires on Sept. 30, as does the authorization of the federal gasoline tax and highway user fees to finance them. Now there are signs that Republicans in Congress, egged on by Tea Party attacks on the size of government, may block both measures, precipitating more than 100,000 job losses a month.

In a balance-sheet recession caused by too much private-sector debt, the government should also use its resources to catalyze debt workouts and debt reductions.

In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabilize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending.

This would translate into stronger private-sector demand and more jobs. Many economists, including me, warned in 2008 that the economy would not recover until the housing market recovered, and the housing market won’t recover until the debt overhang from the housing bubble is reduced through programs that shift some of the burden to creditors from debtors.

Increases in public spending along with housing relief and expansionary monetary policy helped the economy recover from the Great Depression in the 1930s. The same combination of policies can help the United States recover from the Great Recession now.

At the end of World War II, the federal debt-to-G.D.P. ratio was 109 percent, one and a half times what it is today. Yet after the war the economy thrived, and no one questioned the government’s ability to pay its debt over time.

We should now be fighting a war against unemployment and the waste of resources, poverty, inequality and the hopelessness it causes.

Government debt may rise as a result of this war effort, but no one will question the government’s ability to pay its debt provided Congress and the president commit now to a balanced multiyear plan to reduce the long-run deficit once the war against unemployment has been won and Americans are back at work.

Still Playing Catch-Up, Across the Economy

Given that the downturn began nearly four years ago, and that the population has grown significantly since then, the economy should instead be bigger than it was before the financial crisis. But Calculated Risk, a finance blog, makes a good observation: On most major measures of economic health, the economy is still worse today than it was before the recession began.

CATHERINE RAMPELL

Dollars to doughnuts.

Here’s a chart I’ve put together showing the percentage changes in several important economic indicators since the start of the recession in December 2007. The categories are: overall economic growth (gross domestic product), jobs (nonfarm payrolls), personal income (without transfer payments from the government, like unemployment benefits), the length of the workweek, personal spending, and industrial production.

Dollars to doughnuts.

As you can see, all of these categories but one are still below where they were when the recession began. Industrial production is by far the worst off, since an index of this activity is nearly 8 percent below its level in December 2007. Second-worst is employment; today there are 5 percent — or about seven million — fewer payroll jobs than there were when the recession began.

Inflation-adjusted personal income and gross domestic product are still below the last business cycle peak, as is the average work week.

The one major indicator shown that is (barely) above its level at the start of the recession is inflation-adjusted consumer spending. Much of that growth has been subsidized by government transfer payments, however. And to further rain on this parade, remember that if the economy were healthy, consumer spending would probably be much higher today than it was before the recent recession. Just take a look at the longer-term trend:

Economic Growth: Worse Than We Thought

The good news six months ago was that the United States economy, as measured by gross domestic product, had completely recovered all the losses it suffered in the recession.

Never mind.

FLOYD NORRIS

Notions on high and low finance.

The revised G.D.P. numbers put out by the government today make the recent history, which we thought was pretty poor, even worse.

Notions on high and low finance.

Even with a small gain in real G.D.P. in the second quarter, the total size of the economy, $13.27 trillion in 2005 dollars, is $55.9 billion, or 0.4 percent, smaller than the revised number for the fourth quarter of 2007. The revisions indicate the economy was larger before the downturn than we had thought and is smaller now.

We are now told that during the recession, the economy shrank by 5.1 percent. That is a full percentage point more than the 4.1 percent the old numbers showed. The recovery has also been slower.

The changes are pretty much across the board in the G.D.P. numbers. Personal consumption expenditures fell by a full percentage point more than previously thought. Gross private investment — on such things as buildings and planes and computers — declined by 34.2 percent during the recession, 2.6 percentage points more than previous estimates.

A note to those who are complaining the federal government is too big: we are now told that nonmilitary spending contributed less than thought to the G.D.P., both during the recession and the recovery. The same is true of state and local government spending.

There is one area where the changes make history look better — corporate profits. They were a little lower than we thought in 2008 and significantly higher in 2009 and 2010.

It is small comfort, but the United States still looks relatively good in G.D.P. recovery. Following is the change in real G.D.P. from the prerecession peak to the most recent numbers available. For the United States and Britain, that is the second quarter of this year. For the others it is the first quarter.

Switzerland, +1.2%

Germany, +0.1%

United States, -0.4%

France, -0.8%

Netherlands, -1.0%

Euro zone, -2.1%

Portugal, -2.7%

Britain, -3.9%

Spain, -4.0%

Italy, -5.1%

Japan, -5.6%

Greece, -9.9%

Ireland, -11.5%

Jobs Deficit, Investment Deficit, Fiscal Deficit

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Like many economists, I believe that the immediate crisis facing the United States economy is the jobs deficit, not the budget deficit. The magnitude of the jobs crisis is clearly illustrated by the jobs gap – currently around 12.3 million jobs.

Today’s Economist

Perspectives from expert contributors.

That is how many jobs the economy must add to return to its peak employment level before the 2008-9 recession and to absorb the 125,000 people who enter the labor force each month. At the current pace of recovery, the gap will be not closed until 2020 or later.

Perspectives from expert contributors.

History suggests that recovery from a debt-fueled asset bubble and ensuing balance-sheet recession is long and painful, with significantly slower growth in gross domestic product and significantly higher unemployment for a least a decade. Right now it looks as though the United States is following this pattern.

The jobs gap is primarily the result of the dramatic collapse in aggregate demand that began with the financial crisis of 2008. Even with unprecedented amounts of monetary and fiscal stimulus, the recovery that began in June 2009 has remained anemic, because consumers, the major driver of private demand, have curbed their spending, increased their saving and started to deleverage and reduce their debt — and they still have a long way to go.

As I asserted in my last post (and many other economists, including Lawrence Summers, Alan Blinder, Christina Romer, Peter Orzsag and Robert Shiller, have made this point, too), the jobs gap warrants additional fiscal measures to increase private-sector demand and promote job creation.

Sadly, current signals from Washington indicate that such measures will not be taken.

Instead, the risk grows that large, premature cuts in government spending will reduce aggregate demand, will tip the economy back into recession and drive the unemployment rate back into double digits.

Even if no budget deal is reached and no major spending cuts are made in the near future, there is now a serious risk that the rating agencies will downgrade government debt because of the political stalemate over a long-run deficit reduction plan. That would almost surely produce higher interest rates that could sink the economy into recession again.

Although the jobs gap and the high unemployment rate are the immediate problems in the American labor market, they are not the only ones. And there is no sign that the budget negotiations in Washington are going to address these other problems, either.

Even before the onslaught of the Great Recession, the labor market was in serious trouble. Job growth between 2000 and 2007 was only half what it had been in the preceding three decades.

Productivity growth was strong, but far outpaced compensation growth. Between 2002 and 2007, productivity grew by 11 percent, but the hourly compensation of both the median high-school-educated worker and the median college-educated worker fell.

During the same period, the real median income for working-age households declined by more than $2,000. The 2002-7 recovery was the only American recovery on record during which the income of the typical working family dropped.

And despite the recovery, job opportunities continued to polarize. Employment grew in high-education, high-wage professional technical and managerial occupations and in low-education, low-wage food-service, personal-care and protective-service occupations; employment fell in middle-skill, white-collar and blue-collar occupations. The drop in middle-income manufacturing jobs was especially precipitous.

To fashion the appropriate policy responses to these long-term structural problems in the labor market, it is first necessary to understand their causes. The key contributors are three:

1. Skill-biased technological change that has automated routine work while increasing the demand for highly educated workers with at least a college education, preferably in science, engineering or math.

2. Globalization or the integration of labor markets through trade and more recently through outsourcing.

3. The declining competitiveness of the United States as a place to do business.

Recent studies by Michael Spence and Sandile Hlatschwayo (discussed last week in Economix by Uwe Reinhardt) and by David Autor describe how technological change and globalization are hollowing out job opportunities and depressing wage growth in the middle of the skill and occupational distributions.

A widely cited commentary by Andrew Grove, former chief executive of Intel, and a prize-winning article by Gary Pisano and Willy Shih make similar arguments.

Many of the workers and jobs adversely affected by technological change and globalization are in the tradable goods sector, primarily in manufacturing. Nor is the United States labor market the only one to be affected by these forces: the polarization of employment opportunities is also occurring in the other advanced industrial countries.

Many of them, like Germany, are doing something about it. The United States is not. According to a recent McKinsey study, the United States is becoming a less attractive place to locate production and employment compared with many other countries.

A newly published study by the Information Technology and Innovation Foundation reaches a similar conclusion. The United States is underinvesting in three major areas that help a country create and retain high-wage jobs: skills and training of the work force, infrastructure, and research and development.

Spending in these areas currently accounts for less than 10 percent of all federal government spending, and this share has been declining over time. And that’s despite the fact that the borrowing costs of the federal government have been near historic lows and much lower than the returns on economically justifiable investments in these areas.

Such investments fall into the “non-security discretionary spending” category of the federal budget, the category in line to be cut to historic lows to reduce the government deficit over the next decade.

In my previous Economix post, I said a budget deal should pair fiscal measures aimed at job creation now with a credible plan to reduce the deficit gradually and that both should be passed at once as a package. I also urged that the plan include an unemployment rate target that would postpone serious deficit-reduction measures until the target had been achieved.

I also think the plan should include a separate capital budget that distinguishes government spending on education, infrastructure and research as investments with committed revenues over several years. A capital budget would close the investment deficit in those areas that strengthen American competitiveness and promote high-wage job creation. None of the budget plans currently under debate include a separate capital budget.

The labor market is suffering from two problems: an immediate jobs gap, primarily the result of inadequate demand, and a long-term shortfall in rewarding employment opportunities for American workers, primarily the result of structural forces.

As a result of these forces, even when demand has recovered, many of the good jobs lost during the last decade will not be replaced by new good jobs without significant public investments to strengthen the attractiveness of the United States as a production location.

So far, the deficit-reduction proposals attracting attention do not address the labor market’s dual problems and leave many American workers and their families to face another lost decade.

Where the Job Growth Is: At the Low End

There’s more unhappy news for the millions of Americans hoping for a surge in the number of good, high-paying jobs — a new report concludes that the great bulk of new jobs created since the economic recovery began are in lower-wage occupations, paying $13.52 or less an hour.

The report by the National Employment Law Project, a liberal research and advocacy group, found that while 60 percent of the jobs lost during the downturn were in midwage occupations, 73 percent of the jobs added since the recession ended had been in lower-wage occupations, like cashier, stocking clerk or food preparation worker.

According to the report, “The Good Jobs Deficit,” the number of jobs in midwage and high-wage occupations remains significantly below the prerecession peak, while the number of jobs in lower-wage occupations has climbed back close to its former peak.

“During the Great Recession, employment losses occurred across the board, but were concentrated in midwage occupations,” the report said. “But in the weak recovery to date, employment growth has been concentrated in lower-wage occupations, with minimal growth in midwage occupations and net losses in higher-wage occupations.”

The report gives additional ammunition to those who argue, like David Autor, an economics professor at M.I.T., that there is a distinct hollowing out of the middle. It found that the number of jobs in midwage occupations remained 8.4 percent below the prerecession peak, while jobs in higher-wage occupations remained 4.1 percent below and lower-wage jobs were just 0.3 percent below their former peak.

The report divides the nation’s occupations into equal thirds: lower-wage, midwage and higher-wage. It found that during the downturn, the nation lost 3.9 million jobs in midwage occupations, while losing 1.4 million in lower-wage occupations and 1.2 million in higher-wage ones. The report said that of the net employment losses during the recession, 60 percent were in midwage occupations, while 21.3 percent were in lower-wage occupations and 18.7 percent in higher-wage ones.

Since the recession ended, the report said there had been a 1.7 million increase in the number of jobs in low-wage and midwage occupations, with low-wage jobs accounting for nearly three-quarters of that. But the number of jobs in high-wage occupations has declined by 461,994 since the recession ended (from first quarter 2010 to first quarter 2011).

“We should emphasize that it is too early in the recovery to predict whether these trends will continue,” the report said.

The report found that real wages had shown “a mild decline” since the recession began, of 0.6 percent. For workers in lower-wage occupations, median wages fell 2.3 percent after inflation — partly because many of the newer workers hired had lower wages than others in that group. For workers in midwage occupations, wages slipped by 0.9 percent, while there was some good news for workers in higher-wage occupations — their wages rose by 0.9 percent.

The report said the biggest job losses among higher-wage occupations came among managers, computer scientists and systems analysts, human resources workers, registered nurses and accountants and auditors.

The report was written by Annette Bernhardt, policy co-director of the National Employment Law Project. It said lower-wage occupations were those with median hourly ranges of $7.51 to $13.52 an hour (translating to $15,621 to $28,122 a year for a full-time worker), midwage occupations were $13.53 to $20.66 an hour ($28,142 to $42,973 for yearly full time) and high-wage occupations had median hourly ranges of $20.67 to $53.32 ($42,994 to $110,906 for yearly full time).

On Debt Talks, a Lose-Lose-Lose-Lose Situation

1:07 p.m. | Updated with a fifth (less likely) scenario.

Almost whatever happens this week with Washington’s debt talks, the economy will most likely be worse off.

As Dean Maki, the chief United States economist at Barclays Capital, put it: “The basic issue is that the U.S. is on an unsustainable fiscal track, which is pretty widely agreed upon. From that point, none of the choices are fun.”

CATHERINE RAMPELL

Dollars to doughnuts.

Here are the likely scenarios I see:

Dollars to doughnuts.

1) Held up by disputes over how to reduce deficits, Washington doesn’t raise the debt ceiling in time. As a result, the Treasury stops paying debts it owes.

If that happens, the rating agencies downgrade the United States’ debt. The cost of borrowing for the United States government shoots up, since lenders demand higher interest rates from borrowers that are less trustworthy. Many other interest rates are pegged to the cost for the United States to borrow, making interest rates on all sorts of other loans, like mortgages, rise too. Credit markets freeze up, crushing an already-feeble economic recovery.

Macroeconomic Advisers predicts that failing to raise the debt ceiling in time — even if the delay is only one month — will very likely result in a new recession. And because it’s more expensive for the United States to borrow, the United States debt gets even larger, the exact opposite effect from what fiscal hawks are hoping for.

2) Held up by disputes over how to reduce deficits, Washington doesn’t raise the debt ceiling in time. But rather than default on its debt, it diverts money from other spending into paying back bondholders.

That could mean that Social Security checks are not sent, soldiers in Afghanistan and Iraq are not paid, and all sorts of other consequences.

In addition, bond markets might still freak out because the threat of default remains, so interest rates could rise anyway and cause all the terrible consequences in Scenario No. 1 (potential second recession and even bigger federal debt).

3) Washington comes up with a deal to raise the debt ceiling, but it amounts to less than $4 trillion in savings.

Standard & Poor’s has said that just raising the debt ceiling is not enough; without a “credible” plan for at least $4 trillion in savings, the United States might still have its credit rating downgraded. That could, again, mean higher interest rates and all the other terrible consequences of Scenario No. 1.

4) Washington comes up with a deal to raise the debt ceiling that amounts to more than $4 trillion in savings over a near-term horizon.

The credit rating agencies are appeased, but such severe austerity measures put the fragile economic recovery at risk. The states in particular are anxious about what major spending cuts mean for them and for the many social safety net services they provide with federal support.

As Bruce Bartlett and others have written, similar fiscal tightening during a fragile economy happened in 1937. Those actions resulted in a severe second recession and prolonging of the Great Depression, partly because it was coincident with monetary tightening as well. While a sharp, sudden monetary tightening seems unlikely, the Fed is at the very least pulling back on its easy monetary policy with the end of its second round of quantitative easing.

As The Wall Street Journal’s Kelly Evans observed, Japan had a similar experience in 1998, when austerity measures were followed by a recession and a widespread sell-off of Japanese bonds.

And even if these likely American austerity measures don’t result in an outright recession, job growth is already so feeble that most Americans still think we’re in recession.

Imagine how terrible things would feel if the economy slowed down even further.

5) Washington comes up with a deal to raise the debt ceiling that amounts to more than $4 trillion in savings, but over a longer-term horizon.

This is the best-case scenario: It deals with the long-term unsustainability of the country’s fiscal arrangements — which is good for growth in the long run — but doesn’t rock the boat in the current economic recovery.

Unfortunately, it also seems to be the scenario that is least likely to be pulled off effectively.

Economists want spending cuts and/or tax increases that come after 2012, when the economy is expected to be stronger. But to use Standard & Poor’s lingo, cuts that take effect in 2012 may not be fully “credible.” Committing to future cuts/tax increases is just another way of kicking the can down the road, as Washington has been doing for decades now. Almost every time Congress promises painful fiscal measures at some future date, later politicians jump in to dismantle them just before they take effect.

“We do seem to have a time-consistency problem,” Mr. Maki said. “There does never seem to be a good time for major cuts, and they’re not going to be more popular five years from now versus now.”

He says that Congress must come up with a way to prove that these are cuts that will actually happen, versus something that’s on the drawing board and is therefore erasable.

Unfortunately, he says, “There is no way to completely tie the hands of future legislators.”