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News from EPI Republican-led austerity measures have stifled economic recovery

In Why is recovery taking so long—and who’s to blame?, EPI Research and Policy Director Josh Bivens argues that slow growth after the Great Recession is due primarily to the fiscal policy passed by Republican lawmakers in Congress and austerity-minded state legislators.

Economic growth since the Great Recession has been extraordinarily sluggish. For example, Bivens points out, it took 51 months once recovery began just to regain the jobs lost during the recession—longer than any of the previous three recoveries. While the depth and severity of the Great Recession can help explain why it has taken so long for recovery to be achieved, Bivens argues that the primary impediment to a faster recovery has been excessively austere fiscal policy, particularly cutbacks in public spending growth.

“The recovery since 2009 has been historically slow, and the disappointing pace can be explained almost entirely by the fiscal austerity imposed by the Republicans in Congress,” says Bivens. “To be blunt, if public spending since the Great Recession had followed the path it took during the recovery presided over by Ronald Reagan in the early 1980s, the U.S. economy would have been fully healed for years now.”

The most direct and efficient way for fiscal policy makers to stimulate employment is through increased public spending. However, after the Great Recession government spending not only failed to rise fast enough to spur a rapid economy, it outright contracted from pre-recession levels. Per capita spending in the first quarter of 2016—27 quarters into the recovery—was 3.5 percent lower than it was in the trough of the Great Recession. In contrast, 27 quarters into the 1980s recovery, spending was 17 percent higher than it had been in the trough of the recession.

During the Great Recession itself, fiscal policy was on track to stop the freefall and aid recovery. The Obama administration championed several initiatives, including the American Recovery and Reinvestment Act of 2009, that boosted government spending and stopped the economic hemorrhaging caused by the recession. However, the 2011 Budget Control Act, the passage of which was driven by Republican lawmakers, significantly reduced the growth of spending. Compounding this, many Republican governors and state legislatures joined in the spending austerity, leading the state and local sector to become as a very large drag on recovery.

Bivens argues that this fiscal policy mistake was particularly damaging because conventional monetary policy was more limited during the Great Recession than it had been in any other postwar recovery. The federal funds rate (the key short-term interest rate controlled by the Federal Reserve) was just 0.18 percent at the 2009 trough, so the Fed did not have much room to lower interest rates to speed recovery. Additionally, core inflation was at just 1.2 percent in the 2009 trough, which was too low to add more leverage to the Fed’s monetary policy.

“Traditionally, the quickest policy response to recessions is the Fed lowering short-term interest rates. However, low interest rates and low inflation meant that this kind of conventional monetary policy had much less scope to spur recovery than in the past,” said Bivens. “This means that the economy needed a particularly large fiscal boost to aid recovery. But it didn’t get that.”