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Unending Stimulus, or Temporary Stimulus Followed by Restraint?

While Congress slogs through the final months of the health reform debate, the American people remain focused on the economy. With good reason: We’re in a very deep hole, and it’s not clear how we’re going to get out. 

As Christina Romer, chair of the president’s Council of Economic Advisors, pointed out in her recent testimony before the Joint Economic Committee, “The shocks that hit the U.S. economy last fall were, by almost any measure, larger than those that precipitated the Great Depression.” And despite unprecedented government action, the labor market has reflected these shocks. Since the current recession began in December of 2007, the economy has shed 7.6 million jobs—5.2 percent of the prerecession total. By contrast, only 1.45 million jobs (1.9 percent) were lost in the 1973-75 recession and 2.64 million (3.1 percent) in 1981-82. And Bureau of Labor Statistics data reveal a stunning fact: In the past ten years, for the first time since the Great Depression, there has been no net job generation in the private sector. As of the end of September 2009, non-farm private employment stood at 108.5 million; in September 1999, the comparable figure was 108.7 million. Otherwise put, the current recession has already nullified all the employment growth of the previous 8+ years, and we may not have hit bottom yet. 

Romer predicted that economic growth and job generation between now and the end of 2010 will barely be high enough to keep unemployment from getting worse. And there are, she stressed, important downside risks, including unusually tight credit conditions and larger than expected productivity gains. As Paul Krugman pointed out yesterday, “At current growth rates we’d be lucky to see the unemployment rate fall by half a percentage point per year, meaning that it would take a decade to return to something like full employment.” And that’s if growth continues at the most recent quarter’s rate without interruption until 2019, which hardly anyone expects. 

Krugman’s proposed response is more government stimulus as far as the eye can see.  But Romer appears to believe that the long-term fiscal situation places limits on the government’s ability to continue fiscal stimulus beyond the near-term: “The Mid-Session review released in August predicted ... substantial structural deficits even once the recession is over and the economy is fully recovered. Such long-term deficits are unacceptable and need to be dealt with. Over the long run, sustained deficits crowd out private investment and reduce long-run growth.” Although Romer holds out hope that health reform could “improve the long-term fiscal situation dramatically,” the CEA’s own report issued last June undercuts that hope, as I pointed out in a previous TNR column. 

So which is it to be—unending stimulus, regardless of the deficit and debt, or temporary stimulus followed by fiscal restraint? That is the debate Democrats need to have and cannot indefinitely postpone. But the advocates of restraint, in whose camp I count myself, must ask themselves a question: What are we proposing in place of open-ended stimulus to save the American people (and especially young Americans just starting out) from a lost decade of constricted opportunity?