Professor Emeritus of Economics Thomas R. Brown Professor in Economics Education

U.S. ECONOMY— BETWEEN A ROCK AND A HARD PLACE

THE “GREAT RECESSION” HAS BEEN OVER FOR MORE THAN TWO YEARS! OFFICIALLY ENDED JUNE 2009

TODAY A WORLD WITH MUCH ANGST! ANGST - STILL THE WORD DU JOUR

 December 2007 start of the recession Unemployment 5.0%  September %  Total unemployment 16.4%  Currently over 14 million unemployed  6 million have been unemployed for six months = post WWII record  Discouraged workers = 6.4 million

Sept, 2011 Sept, 2010  Less than H.S.13.3%15.0%  H.S. no college 9.7%10.8%  Some college 9.0% 8.6%  College Grad 5.0% 4.8%

Participation rate = % population over age of 16 in labor force September % January % Employment rate = % of population over the age of 16 employed September % January %

MORE WORKING THAN MEN MORE IN THE LABOR FORCE THAN MEN MORE HIGH SCHOOL GRADUATES THAN MEN MORE IN COLLEGE THAN MEN MORE SEEK ADVANCED DEGREES THAN MEN

CPI Annual Rate September = 3.8%

GREAT RECESSION HOW BAD WAS IT? 18 months Longest recession since the Great Depression

UNDERPERFORMING 2009 GDP2010 GDP 2011 GDP Q1 -6.4%Q1 3.7% Q1 0.4% Q2 -0.7%Q2 1.7% Q2 1.3% Q3 1.6%Q3 2.5% Q4 5.0% Q4 2.3% Too slow to lower unemployment rate

Growth at the end of previous longest recession th Q 0.3%1 st Q 8.0% 2 nd Q7.1% st Q 3.3% 2 nd Q 9.3% 3 rd Q 8.1% 4 th Q 8.5%

AGGREGATE DEMAND = AD AD = C + I + G + X C = CONSUMER SPENDING I = INVESTMENT SPENDING G = GOVERNMENT SPENDING X = NET EXPORTS ( EXPORTS-IMPORTS)

HIGH UNEMPLOYMENT Fiscal Policy Increase government spending Decrease taxes Run a budget deficit Monetary Policy Lower federal funds rate Lower reserve requirements Buy bonds in the open market Increase banks’ excess reserves

UNSUSTAINABLE Deficit  Fiscal 2009$1.4 Trillion  Fiscal 2010$1.3 Trillion  Projected 2011 $1.3 Trillion  Projected 2012$973 billion ADDICTED TO DEFICITS

Total national debt = $ 14.8 Trillion  Debt held by foreign govts.$4.3 Trillion  Debt held by U.S. citizens$5.6 Trillion  Debt held by trust funds$4.8 Trillion

 Debt ceiling – Hit May 16, 2011  Two temporary increases Since 1962 the US has reached the debt ceiling 76 times 4 times we did not immediately raise the ceiling—but we always eventually did

THIS YEAR THE NATIONAL DEBT HAS BEEN INCREASING AT AN AVERAGE OF $4.3 BILLION/DAY

Fiscal Year 2011 Record high interest payment on the debt $434 billion With record low interest rates!

Government spending Record high post WWII percentage of GDP 25.3% Post WWII average 20.4% FEDERAL TAX COLLECTIONS Record low post WWII percentage of GDP 14.4% Post WWII average 18.5%

For all practical purposes … Fiscal policy is dead!

KEYNESIAN POLICY HAS PLAYED OUT ADOPTED AS A POLICY TOOL IN 1946 TAX REBATES STIMULUS PACKAGES AUTO BAILOUT CASH FOR CLUNKERS FIRST TIME HOME BUYER TAX CREDIT NEW APPLIANCE TAX CREDIT CUTS IN THE PAYROLL TAX EXTENDED UNEMPLOYMENT BENEFITS AND MORE

State and local governments continue to downsize Private sector is doing a little hiring Government sector letting people go Since 2008 States have cut 98,000 jobs Local governments have cut 409,000 jobs

37% of federal government spending is currently being financed by borrowing Unsustainable!

 Mandatory spending  % of budget  % of budget  Add defense  83% of budget  17% discretionary

“EVERYBODY WANTS TO GO TO HEAVEN, BUT NOBODY WANTS TO DIE”

 2010 Social Security and Medicare Trustee’s Report  Medicare unfunded liability $89 Trillion  Social Security unfunded liability $18 Trillion  Total unfunded liability $107 Trillion THIS IS WHERE THE MONEY IS!

Solution! First try — National Commission on Fiscal Responsibility and Reform

“The Moment of Truth”

 Make America better off than it is today  Don’t disrupt fragile economic recovery  Cut red tape and unproductive government spending  Protect the truly disadvantaged  Cut spending we can’t afford  Demand productivity and effectiveness from Washington  Simplify and reform tax code  Don’t make promises we can’t keep

New super committee  6 Democrats  6 Republicans  Charge—Reduce deficit by $1.5 trillion  Maybe $2 trillion with jobs bill

UNTRUSTWORTHY RECENT POLL 81% SAID THEY TRUSTED GOVERNMENT TO DO WHAT IS RIGHT SOME OF THE TIME OR NEVER!

12% of voters approve of Congress

We cannot grow ourselves out of this deficit. It is a structural deficit The problem is real and the solution will be painful.

 Hyper expansionary monetary policy  The Federal Reserve’s balance sheet has exploded !  June 2007$ 869 Billion  September 2011$2.82 Trillion Where did the Fed get the money to buy APPROX.$2 trillion assets?

Is the Fed’s monetary policy gun out of bullets? Where is the money multiplier?  ZERO INTEREST RATES FOR 33 MONTHS  INJECTED APPROX. $2 TRILLION IN EXCESS RESERVES  QE 1 QE 2 WHAT NEXT?

OPERATION TWIST STOP PAYING INTEREST ON BANK RESERVES PRINT MORE MONEY

The recession will not be viewed as really over until the— “ UNEMPLOYED FAT LADY SINGS ” NO CONCERTS CURRENTLY SCHEDULED

UNCERTAINTY IS PARALYZING THE ECONOMY! WE MUST FOCUS ON LONG-RUN SOLUTIONS NOT ELECTION CYCLE SOLUTIONS

WE MUST BE PATIENT WE MUST FIRST DO NO HARM WE MUST BE THANKFUL FOR WHAT WE HAVE