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Chart shows the weak impact of stimulus spending on the
current recovery from recession compared with previous recoveries.
Janet Yellen, who was chair of the Council of Economic Advisers for a couple of years in President Bill Clinton's second term and is now vice chair of the Federal Reserve, has always leaned toward emphasizing the Fed's mission of maximum employment than its mission of controlling inflation. She was the president and CEO of the Federal Reserve Bank of San Francisco in 2009 when some of us hoped she might be nominated to replace Ben Bernanke as Fed chair.

Her speech Monday was not a spectacular departure from what she has said in the past. Nor did she break any new ground for those of us who have been following the progress of the economy since the Great Recession plunged us into post 1930s record-breaking territory on a number of fronts. Key among those has been how long it's taking for the unemployment rates (both narrowly and broadly determined) to return to anything that isn't ripping the skin off (and the guts out of) tens of millions of American workers.

But while the speech doesn't say anything particularly new, it's still good to hear from an official source, so join me below the fold and see what she had to say.

In trying to account for why this recovery has been so weak, it is helpful to first consider several important factors that have in the past supported most economic recoveries. By this I don't mean everything that contributes to economic growth, but rather those things that typically play a key role when the U.S. economy is recovering from recession. Think of these as the tailwinds that usually promote a recovery.

The first tailwind I'll mention is fiscal policy. History shows that fiscal policy often helps to support an economic recovery. Some of this fiscal stimulus is automatic, and intended to be. The income loss that individuals and businesses suffer in a recession is partly offset when their tax bills fall as well. Government spending on unemployment benefits and other safety-net programs rises in recessions, helping individuals hurt by the downturn and also supporting consumer spending and the broader economy by replacing lost income. These automatic declines in tax collections and increases in government spending are often supplemented with discretionary fiscal action--tax rate cuts, spending on infrastructure and other goods and services, and extended unemployment benefits. These discretionary fiscal policy actions are typically a plus for growth in the years just after a recession. For example, following the severe 1981-82 recession, discretionary fiscal policy contributed an average of about 1 percentage point per year to real GDP growth over the subsequent three years.

However, discretionary fiscal policy hasn't been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as [the chart above] indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery. State and local governments were cutting spending and, in some cases, raising taxes for much of this period to deal with revenue shortfalls. At the federal level, policymakers have reduced purchases of goods and services, allowed stimulus-related spending to decline, and have put in place further policy actions to reduce deficits. [...]

These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you're unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.

Janet Yellen, now vice chair of the Federal Reserve.
Janet Yellen
As quite a number of progressives have pointed out for four years, one reason the fiscal tailwind hasn't done what was needed of it is the inadequacy of the stimulus passed in the first month of President Obama's first term. That stimulus was shaped into a program far smaller than it should have been—both by the know-it-all timidity of various administration officials, most notably Larry Summers, chief of the president's National Economic Council at the time, and by the stubborn obstructionism of congressional Republicans.

So, while the stimulus certainly ameliorated the damage caused by the recession, it wasn't strong enough to kick-start the economy into a real recovery. Given how dreadfully slow progress on the job front has been, there is every possibility that well before it returns to something near the level of health it was at 63 months ago, we will have fallen once again into recession.

Yellen expresses a bit of optimism for faster improvement come 2014 and later. But what's missing in her speech is something spurring faster improvement now and for not falling into this same trap again in the future. Not that the Fed can provide the whole answer. Unlike the cheap money it has been providing banks, a subsidy by another name, it doesn't have the authority to cut checks for average Americans that would boost demand.

Meanwhile, millions of individuals and families continue to suffer from both the acute problems engendered by the Great Recession and from the chronic problems that predate it and were exacerbated by it. All the while, austerity, both the Republican brand and the less onerous but still wrong-headed Democratic brand, remain the main line of attack by Beltway BSers—pundits, politicians and lobbying pitchmen alike.

Originally posted to Daily Kos Labor on Mon Feb 11, 2013 at 04:35 PM PST.

Also republished by Daily Kos.

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Comment Preferences

  •  Maybe one of these (3+ / 0-)

    days, BO and the dems will notice that we still have an urgent problem.

    The banks have a stranglehold on the political process. Mike Whitney

    by dfarrah on Mon Feb 11, 2013 at 05:37:46 PM PST

  •  Repetition, it works (7+ / 0-)
    Her speech Monday was not a spectacular departure from what she has said in the past.
    Since the average person needs a concept repeated 15 times before they reliably retain it, it's a good thing people like Yellen are willing to repeat themselves.

    Thanks for highlighting another person who could make a lot of difference if promoted. Or whose lessons need to be put in the progressive echo chamber. Hard to say whether her gender or approach is the problem in getting higher on the ladder, most likely some of both.

    I've been stewing over the increase in names and info I want to remember, with the age/health declines in memory adding to a sense of hopelessness. This is the second person today I have learned about and want to be able to remember. Is there an ap for that? ;)  Maybe a sales program to keep track of clients would work.  They could be filed by expertise group, then name. Email programs are similar but I don't want it in the gmail account.

    Should start with all the bells and whistles this OS software has, I may already have something that will work.

    "People, even more than things, have to be restored, renewed, revived, reclaimed and redeemed; never throw out anyone. " Audrey Hepburn "A Beautiful Woman"

    by Ginny in CO on Mon Feb 11, 2013 at 05:47:56 PM PST

    •  Bernanke and Yellen are both Dollar Doves (0+ / 0-)

      i.e., very friendly to monetary stimulus.

      And they win over the Fed decisions by wide margins.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Wed Feb 13, 2013 at 07:43:10 PM PST

      [ Parent ]

  •  Would really like to see a chart of (4+ / 0-)

    how Federal, State and Local spending has declined during this recession compared to a few decades of data.

    This article discusses the decline of Public Enterprise but the charts need more reference.

    Congressional elections have consequences!

    by Cordyc on Mon Feb 11, 2013 at 06:10:05 PM PST

  •  should have become SecTreas (3+ / 0-)
    She was the president and CEO of the Federal Reserve Bank of San Francisco in 2009 when some of us hoped she might be nominated to replace Ben Bernanke as Fed chair.

    Warning - some snark above‽ (-9.50; -7.03)‽ "We're like a strip club with a million bouncers and no strippers." (HBO's Real Time, January 18, 2013)

    by annieli on Mon Feb 11, 2013 at 06:33:25 PM PST

  •  Couldn't pass this up: Joseph Stiglitz clip.. (3+ / 0-)
    Recommended by:
    Larsstephens, LinSea, rl en france

    .. with Paul Krugman & Dean Baker discussing economics @ UP with Chris Hayes - The Role of inequality in the recovery:
    (short commercial - sorry )

    All three experts, approaching wealth inequality from their own perspective, reach very much the same conclusion. That with 93% of the recovery going to the wealthiest at the top, the recession has been prolonged by this fact more than most every other factor.

    Also too: One thing if I'm getting this correct is that without the manipulation of tax laws favoring those with the means to do so, this disparity would be much less egregious/exaggerated top to bottom.

    Iow's without this  un-"free market" (free market - so cherished in words only imo) manipulation, the economy would tend to balance out wealth more fairly.

  •  WPA, CCC IN 1935 (0+ / 0-)

    These were the answers in the Great Depression, and they are the answers today. Maybe not the programs exactly as they were before, but along the lines of getting people back to work, and stimulating the economy. They worked then and I believe that they will work now.

  •  Maximum employment is a Fed goal? (0+ / 0-)

    That's the first I've ever heard of that.

    Seems like a good goal, but I'd like to know where that comes from.  Is it something official or just the logical consequence of fiscal and monetary policy?

    LG: You know what? You got spunk. MR: Well, Yes... LG: I hate spunk!

    by dinotrac on Thu Feb 14, 2013 at 04:55:37 AM PST

    •  It has been the mandated Fed goal ... (2+ / 0-)
      Recommended by:
      splintersawry, dinotrac

      ...36 years. The Federal Reserve Act was amended in 1977:

      The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.

      Don't tell me what you believe, show me what you do and I will tell you what you believe.

      by Meteor Blades on Thu Feb 14, 2013 at 07:18:13 AM PST

      [ Parent ]

      •  Thanks! (0+ / 0-)

        I don't know how I've managed to not know that, but it is good to know.

        Reminds me of a conversation I had with somebody last year regarding what constitutes an American car, especially when some "foreign" models have more domestic content than the local brands.

        He said "where the profits go". I said "where the jobs are".

        Businesses have to worry about profits.
        The government, however, has a Constitutional mandate -- right there in the very first paragraph -- to promote the general welfare, not just the 1% welfare.

        That means, if you're the government, you care about jobs at least as much as profit.

        LG: You know what? You got spunk. MR: Well, Yes... LG: I hate spunk!

        by dinotrac on Thu Feb 14, 2013 at 10:23:00 AM PST

        [ Parent ]

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