September 28, 2010

Recession led to tremendous loss of output; Fed can buy and hold debt to spur recovery.

For Immediate Release: September 28, 2010
Contact: Alan Barber, (202) 293-5380 x115

Washington, D.C.-  While the official recession has ended, the U.S. economy is still facing near double-digit unemployment and there are few signs of an imminent recovery. The Center for Economic and Policy Research (CEPR) has created a Recession Waste Calculator to illustrate just how much output has been lost to the downturn. A separate report from CEPR, points out that this loss is unnecessary and that there are essentially pain-free policy routes to restore the economy to normal levels of output.

The report, "Feel No Pain: Why a deficit In Times of High Unemployment is Not a Burden," demonstrates the need to address the current unemployment crisis even at the risk of carrying large deficits.

"Unfortunately, current policy debates are focused on the budget deficit and national debt," said Dean Baker, author of the issue brief and a co- director at CEPR. "However, in times of severe joblessness and low consumption, deficit spending is the best means to spur job growth."

The report details the implosion of the $8 trillion housing bubble and an addition $6 trillion decline in stock wealth that led to a drop in construction and consumption spending on the order of $1,200 billion. The Recession Waste Calculator creatively puts into common terms the goods and services we have lost as a result.

The report notes that the drop in interest rates and the stimulus package have been helpful in raising demand. Unfortunately, the beneficial effect from these measures has not been large enough to offset the loss of demand caused by the collapse of the housing bubble. Restoring the economy to normal levels of output will require increased government spending on services, investment in infrastructure or research and development,  and/or additional tax cuts to boost private consumption.

The paper emphasizes that this stimulus need not create any future interest burden since the Federal Reserve can simply buy and hold the additional debt rather than borrowing from the public.

Baker noted. "This has been done before, and The Fed has at its disposal all of the tools necessary to dampen the risks of inflation while addressing the need to stimulate demand."

The full report and the Recession Waste Calculator can be found on the CEPR website.

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