The Two Year Anniversary of the Non-Recovery

This month marks the two-year anniversary of the end of recession and start of recovery. But it’s a recovery in name only, so weak as to be nonexistent. And it has been weak from the start. Real GDP growth has averaged only 2.8 percent per year compared with 7 percent after last deep recession in 1981-82, as shown in the following chart. And the unemployment rate is still over 9 percent.

Today the Joint Economic Committee of the Congress held a hearing on whether a credible plan to reduce government spending growth would bolster or hinder the recovery. I argued that a credible budget strategy would strengthen the recovery, by removing the threats of another fiscal crisis, higher taxes, higher inflation and higher interest rates—all caused by the huge deficits and growing debt and all impediments to private investment and job creation (written testimony here and opening remarks at C-Span 6:23 minutes here). To balance the budget without increasing taxes the plan would have to reduce spending growth by $6 trillion over ten years.

Fortunately, there are some signs of progress: The election last November sent a message to Washington to reduce the deficit and the debt; the 2011 budget deal reduced 2010-2011 growth in discretionary budget authority from +$39B to -$39B; President Obama withdrew his first budget proposal for 2012 and is agreeing to less spending; and the idea of tying the debt limit hike to reductions in spending growth is holding, despite protests from the Treasury Secretary and the Fed Chairman.

One way to implement a credible budget strategy in our current divided government would be to agree now to reduce spending by $2.5 trillion over ten years (including material changes in 2012) as part of the $2.5 trillion debt limit hike, and then debate how to deal with the remaining $3.5 trillion gap in the presidential election. One side would say to close the gap by raising taxes. The other side would say to close the gap by reducing spending. While the outcome would still be uncertain, there would be far less uncertainty about the budget than currently exists.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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