Turning the Corner: U.S. Economic Policy and National Recovery

Alumni Affairs DinnerAlumni CenterNortheastern University

Barry BluestoneDean, School of Social Science, Urban Affairs, and Public Policy

March 4, 2009

The 1970s - Troubled The 1970s - Troubled TimesTimes OPEC and the Energy CrisisOPEC and the Energy Crisis Declining Productivity; Sluggish Declining Productivity; Sluggish

Growth, Rising UnemploymentGrowth, Rising Unemployment Wage Declines, Stagnant Family Wage Declines, Stagnant Family

IncomesIncomes Growing InequalityGrowing Inequality

The 1980sThe 1980s

Supply Side EconomicsSupply Side Economics Massive Tax Cut/Massive DOD Massive Tax Cut/Massive DOD

BuildupBuildup Growing Federal DeficitsGrowing Federal Deficits DeregulationDeregulation PrivatizationPrivatization Rising Inequality Rising Inequality

0%

1%

2%

3%

4%

5%

Ave

rag

e A

nn

ua

l G

row

th R

ate

1959-1969 1969-1979 1979-1989 1989-1995

4.4%

3.2% 3.0%

2.3%

Revised GDP Growth Rates1959-1995

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Annual U

nem

plo

ym

ent R

ate

1960s 1970's 1980's

5.3%

6.2%

7.3%

Average Unemployment RateUnited States 1960-1989

Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Ave

rag

e A

nn

ua

l G

row

th

1949-1959 1959-1969 1969-1973 1973-1979 1979-1989 1989-1995

3.4%

3.1% 3.1%

1.3%1.2% 1.1%

Labor Productivity Growth1949-1995

Source: for 1949-59, Krugman, Age of Diminished Expectations; 1959-99, Economic Report of the President, 2000.Growth in Output per hour of work in Business Sector

Figure 3.1

1949-1973 1973-1995

-1%

0%

1%

2%

Annual P

erc

ent C

hange

Lowest 20%Lower Middle

MiddleUpper Middle

Top 20%

-0.6%

-0.2%

0.2%

0.5%

1.3%

How Family Income Grew1973-1995

Figure 6.2

Source: U.S. Department of Labor

Why Prosperity Ended?Why Prosperity Ended?The Conventional WisdomThe Conventional Wisdom

Oil CrisisOil Crisis Strong unions generate Wage-Price SpiralStrong unions generate Wage-Price Spiral Mushrooming Federal DeficitsMushrooming Federal Deficits Inflationary PressuresInflationary Pressures Falling Family Saving RatesFalling Family Saving Rates Too much Government RegulationToo much Government Regulation Too much Social Welfare SpendingToo much Social Welfare Spending Corporate Myopia in face of Import Corporate Myopia in face of Import

ChallengeChallenge

Prosperity Regained

1995-2000

0%

1%

2%

3%

4%

5%

Ave

rag

e A

nn

ua

l G

row

th R

ate

1959-19691969-19791979-19891989-19951995-1999

4.4%

3.2% 3.0%

2.3%

4.5%

Revised GDP Growth Rates1959-1999:III

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Annual U

nem

plo

ym

ent R

ate

1960s 1970's 1980's 1990-95 1996-98

5.3%

6.2%

7.3%

6.4%

4.9%

Average Unemployment RateUnited States 1960-1998(II)

Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics

Figure 4

Wall Street Model PoliciesWall Street Model Policies

Tight monetary policy to keep Tight monetary policy to keep inflation under controlinflation under control

Deficit Reduction/Surplus Generation Deficit Reduction/Surplus Generation to raise aggregate savings rateto raise aggregate savings rate

Free Trade to keep prices downFree Trade to keep prices down Weak Trade Unions to keep wages Weak Trade Unions to keep wages

downdown Welfare Reform aimed at increasing Welfare Reform aimed at increasing

labor supplylabor supply

The Wall Street Model of Growth

RisingStockPrices

SubduedInflation

IncreasedWealth

IncreasedSpending

OutputGrowth

IncreasedCorporate

Profit

VirtuousCycleTechnological

Innovation

Wall StreetVirtuous Cycle

IncreasedCapital

Investment

ImprovedProductivity

Figure 1.2

SubduedInflation

FallingInterestRates

FallingInterestRates

IncreasedSavings

IncreasedSavings

The Wall Street Model

You Live by the Wall Street Model … You die by the Wall Street Model

Based on stock market appreciation Focus on financial transactions, not real

production of goods and services Casino Society Massive Debt – Government,

Households, Foreign Massive Redistribution of Income and

wealth ... CREATES MASSIVE INSTABILITY

3.6%3.1% 2.9%

2.2%

0.0%

-6.4%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2004 2005 2006 2007 2008:I 2008:IV

Real GDP Growth Rate 2004-2009

5,481,000

9,266,000

6,688,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Civilian Unemployment (January 1998 - January 2009) (in 000s)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

11,616,000

3.8%

6.3%

4.4%

7.2%

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Civilian Unemployment Rate (1998-2008)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

January 2009: 7.6%

Loss in Employment (December 2007-December 2008)

Change in Employment

Percentage Change

Construction -632,000 -8.5%

Manufacturing -791,000 -5.7%

Retail Trade -522,000 -3.4%

Financial Services -148,000 -1.8%

Temp Services -490,000 -19.0%

$50,782

$52,173

$53,349

$54,127

$55,823

$57,734

$59,088$59,398

$58,545$57,920 $57,751 $57,705

$58,036$58,407

$57,648

$46,000

$48,000

$50,000

$52,000

$54,000

$56,000

$58,000

$60,000

$62,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Real Median Family Income ($2006)

24 25 2435

5060

120

100

300

148

250

275

0

50

100

150

200

250

300

350

1965 1970 1975 1980 1985 1990 1993 1995 2000 2003 2005 2007

Pay Ratio: Chief Executives of American Companies/Average Worker's Salary

U.S. Personal Savings Rate (1998-2008:I)

4.3%

2.3%2.1%

0.4%0.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1998 2000 2004 2007 2008:I

Personal Savings Rates Plummeting

-$215

-$301

-$417-$384

-$461

-$523

-$624

-$728

-$788

-$731-$704

-$900

-$800

-$700

-$600

-$500

-$400

-$300

-$200

-$100

$0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Balance of Trade ($B)

U.S. Federal Debt (in $billions)(1940-2009)

$50.7$260.1 $290.5 $380.9

$909.0

$4,001.8

$5,628.7

$7,905.3

$8,950.7

$10,413.4

$0.0

$2,000.0

$4,000.0

$6,000.0

$8,000.0

$10,000.0

$12,000.0

1940 1945 1960 '1970 1980 1992 2000 2005 2007 2009 (Est.)

Federal Debt nearly double since 2000

The Debt Bomb With massive personal debt, federal

debt, and adverse balance of trade With the Wall Street psychology of

quasi-Ponzi schemes, the tinderbox was set for ignition

The unraveling of the subprime mortgage market was the spark that set in motion the economic collapse we have experienced

Economic Collapse Massive Foreclosures Massive Wealth Effect … with personal

portfolios in free-fall Translation of financial collapse into real

economy … with sharp cutbacks in demand and consequently sharp increases in unemployment

Now states and cities in free fall, adding to the crisis

Vicious Circle … with a stimulus package perhaps not large enough or soon enough to keep unemployment from reaching 10 percent by late this year

A Better Stimulus Package

What Really Needs to be Done? – National Economy

Phase I – Instant Stimulus “Uncle Sam” Debit Card Home Price Insurance System

Phase II – Short-term Stimulus Massive General State and Local

Revenue Sharing Extended Unemployment Benefits

Phase III – Longer-term Stimulus Public Infrastructure Investment