By Burton Speakman
and Jamison Cocklin
Less than five years after the start of the greatest financial crisis since the Great Depression, the U.S. economy still grows at an anemic pace.
Republicans and Democrats on the campaign trail have traded barbs over what was — and what wasn’t — done during and after a recession as the American economy hemorrhaged 8.7 million jobs between December 2007 and early 2010.
The upcoming election will serve as a litmus test on the four years of economic policy, which produced:
• Non-farm payroll employment 3.2 percent lower than at the start of the recession.
• An unemployment rate nearly frozen from when President Barack Obama took office.
• An economic growth rate that appears stuck in neutral, growing only slightly in the last 13 quarters.
The current policies of Obama are dismissed by some for being so insufficient that they worsened the recession.
But Republican presidential candidate Mitt Romney’s ideas are dismissed by others for being either unexplained or for being too similar to the policies blamed for the recession.
“Are we better off than we were four years ago?” is a political touchstone.
An economist might approach that concept differently:
“Given economic cycles, is it reasonable for us to have expected to be better off than we were four years ago?”
“When the housing bubble burst, it cost trillions and forced a radical consumption of wealth,” said Josh Bivens, research and policy director at the Economic Policy Institute in Washington, D.C. “The shock it caused was so big that there was never any real reason to think that the recovery would have occurred in less than a decade, especially absent government action.”
Alex Pollack, financial expert for the American Enterprise Institute, said that six or even seven years was a reasonable time for recovery based on the length of the preceding boom.
The only thing that might have slowed the real estate recovery was the tightening of federal regulations, Pollack said.
“Now that they’ve reached the time for recovery, the government has made it harder to get loans, which has slowed growth,” he said.
Obama inherited the recession, but there were certainly things in the recovery that could have been handled differently, said William W. Beach, Heritage Foundation director of the center for data analysis and senior economist.
“Accelerating depreciation has long been the silver bullet for killing a recession,” he said, referring to the process of allowing companies to devalue holdings, like equipment or vehicles, quicker to reduce tax burdens. “For reasons that have never been explained to me, that wasn’t done in this case.”
THE MAKINGS OF RECESSION
In the minds of economists, policy experts and some politicians, the Great Recession was a perfect storm.
The roots of the crisis are found in the years leading up to December 2007. The housing market was booming, fueled by low interest rates and banks willing to approve mortgages for almost anyone.
This gave rise to sub-prime lending where financial institutions would make loans to individuals or families who couldn’t pay for them. Delinquency rates spiked and foreclosures became rampant, causing the housing market to hit bottom.
Investors were left with mortgage-backed securities sold by banks to increase profits. Markets were inundated by faulty securities, the market sank and the financial hole grew deeper.
“Real estate is a cyclical market. Following every boom there’s a bust,” Pollack said. “This will continue as long as you have some semblance of a market economy.”
In this case when there is a tremendous boom, the bust is also going to be sizable, Pollack said. With the recession, the real estate market shrank from $23 trillion to $16 trillion.
“In some parts of the country, the bottom has been reached and prices are starting to go back up,” he said.
The housing boom impacted all parts of the industry, but particularly home construction. Barry Tancer, director of construction operations for Brownstone Construction, said his company spent about four years to gain ownership of the Westbury Park housing development in Canfield.
This project stopped in 2007 when the previous owner ran into financial troubles, just like companies across the country, he said.
“It’s unfortunate. It’s a really nice development,” Tancer said. “One home on the property sat unfinished since construction stopped in 2006.”
Brownstone is just trying to complete the homes and get the development started again, he said.
The housing and stock market crash resulted in a major loss of assets and wealth, said Tod Porter, professor of economics at Youngstown State University. These problems left people with unmanageable debt.
“Typically during a recession, people rely on acquired assets to help them maintain some level of spending,” he said.
There are a lot of people who have compared the most recent recession to the one in 1980, Porter said.
“That recession was almost intentionally caused by actions taken to slow down inflation. When they started easing back those actions, it was still a long time to recover in terms of unemployment,” he said.
According to figures from the Federal Reserve Bank of Minneapolis, the branch of the Federal Reserve that measures economic recoveries, this has been the slowest recovery from a recession since World War II.
This invites comparisons to the Great Depression, which began with a stock market crash in October 1929 and gripped the country for a decade until about 1939 when the economy was aided along by a spike in demand for war goods in Europe.
In all other recessions that have occurred since that war, gross domestic product (the sum of all goods and services produced by the economy) has increased by more than 10 percent by this point in the recovery.
In October 2008, when the GDP was sharply contracting, Congress approved the Troubled Asset Relief Program, commonly referred to as the bailout. The government purchased bad mortgages from financial institutions, to provide banks, insurers and automakers with $700 billion in capital.
Last month, the Congressional Budget Office estimated that $431 billion of the initial $700 billion authorized would be disbursed, at a cost to the federal government of $24 billion, stemming mainly from transactional costs. To date, more than $300 billion has been repaid.
Additionally, in 2009, lawmakers passed the American Recovery and Reinvestment Act at the urging of President Obama. It pumped $787 billion into the economy through tax cuts, unemployment benefits, federal contracts, grants and loans.
The stimulus helped reduce budget cuts and economic harm, but it was not enough, said Amy Hanauer, director of Policy Matters Ohio, a progressive nonprofit policy research organization. Local governments have continued to lose public sector jobs like teachers, law enforcement and others.
“When those people lose jobs, they’re unemployed just like anyone else,” Hanauer said. “We need more resources to get those people back to work for the economic benefit and for the services that they provide.”
Bivens mainly agreed with Hanauer, saying the government’s biggest mistake was pulling back fiscal support too quickly.
Many conservatives have been critical of the first stimulus package and the Romney campaign has suggested that it helped lock the country into slow growth.
The bailout and the stimulus package have at times been deemed the government’s biggest move into the private sector since Democrat Franklin Delano Roosevelt’s administration moved to enact a series of economic programs known collectively as the New Deal at the height of the Great Depression. Roosevelt’s presidency was intertwined with the country’s economic woes, serving four terms from 1932 until his death in 1945.
Critics maintain that the stimulus measures pursued between 2008 and 2009 ballooned the federal deficit. Romney has called for a reduction in federal spending, a cut in marginal income taxes and gradually reducing growth in Social Security and Medicare payments paid to affluent seniors.
President Obama in 2011 faced off with Republican congressional leaders over what they billed as a second stimulus. At the time, Obama advocated for a jobs package that would have reformed the unemployment benefit insurance program, cut taxes for small businesses and families, and provided better refinancing options to underwater homeowners. The effort stalled and the legislation never passed.
“Early on in the recession we were heading off a cliff, policy makers were able to grab the steering wheel and they landed us in a ditch. Unfortunately we’re having a hard time getting out,” said Greg Acs, director of the income and benefits policy center at the Urban Institute. “If that jobs bill would have been passed there’s no telling where we’d be. We just don’t have the answer for those kinds of things.”
‘A PRESIDENT CAN’T DO IT ALL HIMSELF’
Bivens and other sources interviewed for this story generally agree that the stimulus helped to save between 2 million and 4 million jobs. The economy has recovered about 4.3 million of the 8.7 million jobs it lost during the recession.
Friday’s final jobs report before the general election showed the unemployment rate ticked up from 7.8 percent in September, to 7.9 percent in October, with 171,000 new jobs created last month, according to the U.S. Bureau of Labor Statistics.
In order to achieve pre-recession employment levels, the economy needs to create 187,000 jobs per month. About 152,000 jobs have been added per month in the last 31 months.
Currently, the jobs deficit is larger than in any previous recession. At its peak between November 2008 and February 2009 the U.S. lost 3 million jobs, compared to a four-month peak during the 1981-82 recession when about 1.2 million jobs were lost.
The growth rate is modest and reflects what happened after the 1991 and 2001 recessions, but remains below the rate of job recovery from the 1982 recession.
The Congressional Budget Office and the Federal Reserve warn unless the pace picks up, the jobless rate will remain above 5 percent or 6 percent until at least 2016.
“It goes beyond economic policy and one of the real problems we have in this country is we misunderstand our government,” said Paul Sracic, chair of the political science department at Youngstown State University. “Presidential candidates encourage this when they go around saying, ‘Elect me, I have a plan.’”
Bivens added that neither candidate has pressed for more fiscal support from Congress.
“Obama could be making an aggressive case against lawmakers, more and more he could be saying ‘Look, I called for a jobs act in 2011, but it was blocked,’” Bivens said. “Neither Romney or Obama are clarifying that and the gridlock will remain a challenge to growth.”
Likewise, pundits contend if Romney is elected president he could face significant hurdles in implementing his plan to create 12 million jobs in four years.
“I don’t know whether you could generate that level of job creation in this economy, that’s about 250,000 jobs per month,” Acs said. “It’s not outlandish to think... out of historical norms, but regardless of who’s in office the fact remains that it’s just not a roaring, normally functioning economy.”