The Recession Was Even Worse Than Thought

The Economist writes American recessions and recoveries: Recessions compared "THE great recession hit America even harder than previously thought. The GDP data released today by the Bureau of Economic Analysis (BEA) show that output rose by an annualised 1.3% over the second quarter of 2011, worse than had been expected. But the department's annual revisions to previous figures contained still worse news. Annual GDP growth for 2008 and 2009 was revised down by 0.3 and 0.9 percentage points; the 2010 figure was revised up, but not by enough to compensate. The release means that output in America is still at a lower level than its peak before the recession, a point earlier numbers said had been passed at the end of last year."



Ezra Klein comments on The Recovery-less Recovery. "As Wolfers suggests, these numbers solve the mystery in the labor market. This isn’t about confidence or uncertainty or regulations or any of the other bankshot explanations we’ve been using to explain why unemployment seems stuck even as the economy rebounds. The economy isn’t rebounding. Demand isn’t returning. And without demand, there can’t be jobs."

"Which makes congressional dithering over the debt ceiling all the more infuriating. Republicans in Congress are threatening to manufacture an economic crisis unless they’re permitted to slash spending. Meanwhile, we’re in an economic crisis in which the main problem is too little spending. So the choice we’re being presented with is that we can either worsen an existing crisis or trigger a fresh one. With our leaders acting so irresponsibly, perhaps it’s no mystery why we’re having a recovery-less recovery, either."

Brad DeLong says, "A rational Federal Reserve would: (1) Begin QE III today. A rational administration would: (1) Announce a technical fix to the debt ceiling today: the economy does not need the risk. (2) Abandon all long-term budget negotiations with anybody who requires cuts to the deficit over the next eighteen months to come to the table: the economy needs stimulus, not contraption. (3) Take every single uncommitted TARP and TALF and whatever dollar, leverage it up, and throw it at the economy to boost aggregate demand."

Ezra Klein adds, What the new GDP numbers tell us about stimulus. "As Moody’s chief economist Mark Zandi told me this morning, the revisions suggest that the recession following the financial crisis was much, much more severe than we’d thought—the economy actually shrank at a 8.9 percent annual rate the fourth quarter of 2008 and 6.7 percent in the first quarter of 2009 (earlier estimates had shown a smaller, 5.9 percent annualized drop across the two quarters).

Then, Congress passed the stimulus bill, the fall in growth dwindled to 0.7 percent in the second quarter, and, by the third quarter of 2009, we had 1.7 percent growth. “We went from negative to positive at precisely the time that the stimulus was providing maximum benefit in terms of tax cuts and spending increases,” Zandi says. “The numbers actually reinforce the importance of the stimulus in jump-starting a recovery.” "

"Zandi agrees: “If fiscal policy had simply stayed neutral, the numbers suggest we would have had around 2 percent growth these past two quarters, which isn’t great, but it’s a lot better than what we actually had.” Except fiscal policy wasn’t neutral—it was shrinking. The stimulus wound down, that extra government spending started disappearing, and, with it, economic growth dwindled. What’s more, fiscal policy is set to keep shrinking. Remember that the payroll tax holiday and emergency unemployment insurance, both of which were extended in the 2010 tax deal, are scheduled to run out soon."

And what is Congress doing? Talking about big spending cuts, and the President is going along with them.