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How Washington has choked off the recovery

Rick Newman
The Exchange
A woman walks past the U.S. Capitol dome, seen through a porthole in nearby brick-work, in Washington, August 2, 2011. (REUTERS/Jonathan Ernst)

Ben Bernanke is known as “Gentle Ben” because of his avuncular demeanor and discreet use of words. But the Federal Reserve chairman made one comment in his latest (and last) official press conference that would make many voters angry if  it had been expressed in a different manner.

“People don’t appreciate how tight fiscal policy has been,” Bernanke said, in his typical folksy econospeak. Put another way, that means Washington has been hurting the economy and holding back job growth when it should have been doing everything possible to help.

“Fiscal policy” refers to the government’s tax-and-spending plans, which are determined by Congress at the prodding of the president. Monetary policy — pushing interest rates up or down using a variety of measures — is the Fed’s responsibility. And one reason monetary policy has been so aggressive and controversial during much of Bernanke’s 8-year tenure is that fiscal policy has been so weak. With the Fed now starting to rein in one of its key tools — “quantitative easing” — Congress faces more pressure to act like grownups and stop relying on the Fed to do all the heavy lifting on the economy.

In his final press conference, Bernanke referred specifically to government jobs that have been lost since the recession ended in 2009, cutting into economic growth. We dug up the numbers to see what usually happens with government hiring after a recession. Bernanke is right — the distinction between the latest recovery and prior ones is startling.

Since the mid 1950s there have been nine official recessions. Government employment — including federal, state and local jobs — rose after eight of them. The only exception is the latest recession. During the four years following the end of the downturn, in June 2009, government employment fell by 748,000. Here’s a breakdown:

In most instances, state and local government added more post-recession jobs than the feds, which makes sense since those two levels of government employ the most people to start with. But federal grants — usually in the form of traditional “Keynesian” stimulus spending — often provided a lot of the money municipalities used to hire cops, teachers and other types of workers.

That also happened in 2009, with the $800 billion American Reinvestment and Recovery Act, which turned out to be controversial because it didn’t help the economy nearly as much as President Obama promised it would. But it did help protect or create nearly 3 million jobs, according to mainstream economists. The basic problem was the recession turned out to be more stubborn and virulent than most economists believed, even in the middle of it. In fact, it might have turned into a depression, with even greater job losses, without aggressive government intervention.

The stimulus spending peaked around the middle of 2010, which is when the total number of government jobs began to decline. Had this been a normal recovery, the number of government jobs would have continued to tick upward as the economy improved and tax receipts bounced back. The deep real-estate bust cut sharply into tax receipts at many state and local governments, however, and helped keep the whole economy depressed. That’s one of the things the Fed has tried mightily to turn around, by forcing interest rates far below normal levels. It finally began to work in 2013, with a housing recovery now firmly underway. That’s one reason the Fed recently said it would pare back the bond purchases that constitute quantitative easing, with the whole program possibly coming to an end within a year or so.

A considerable toll

Still, budget-cutting in Washington since 2010 has taken a considerable toll on the job market, through spending cuts and tax increases both. And histrionics such as the threats to default on U.S. debt in 2011 and 2013 certainly haven’t helped. The government's huge debt load — more than $17 trillion — is a real problem, but many economists agree the optimal solution is to do more to stimulate the economy now while addressing the debt in a few years, when the economy is healthier.

After a year of tightening fiscal policy, the recent budget deal in Congress loosened things up a bit, with a small amount of additional spending coming in 2014. But that won’t reverse trends in fiscal policy that have made the job market worse. If government employment since the end of the recession had followed the historical pattern, another 1.2 million people would be working and the unemployment rate, now 7%, would probably be closer to 6.5%, or even lower. The Fed may also have begun to rein in quantitative easing much earlier, since goosing the labor market is one of its jobs, and there would have been less need.

There will be arguments forever over the question of whether government spending that goes directly to create jobs is good for the economy or not, in the long run. There’s evidence to buttress both sides. Government spending does tend to crowd out private spending, and the money has to come from somewhere, which can push taxes and public debt loads higher. But there have also been decades’ worth of real-world instances in which Keynesian-style spending helped compensate for a drop in private demand during a crisis, ending a recession sooner than would have happened otherwise.

There may ultimately be more agreement around the idea that we got lucky during the latest recession and the weak recovery that followed, because it could have been a lot worse. The history books may give Bernanke and his colleagues at the Fed a lot of credit for that, if their policies don’t eventually generate runaway inflation or other nasty surprises. At the moment, the worst unintended consequence of the Fed’s aggressive policies seems to be a Congress that can afford to be reckless because somebody else is there to bail it out.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.