Bringing The Great Recession to an end

by: Clem Guttata

Mon Jun 13, 2011 at 05:22:58 AM EDT

I'm flummoxed by the collective insanity gripping our nation. Now that the fumes of a Tea Party Express bus have filled the halls of Congress, all eyes are on an phantom deficit monster instead of the very real suffering of the unemployed.

Meanwhile, back in reality the evidence accumulates that the state of our economy is even worse that official statistics portray.

The Fed's Jeremy Nalewaik argues that a measure of GDP using income levels is a more reliable guide to the actual business cycle than the traditional measure of GDP using spending. If that's true, says Justin Wolfers, the recession started nearly five years ago and was much deeper than we think: GDP per capita dropped 7% and is still well below its pre-recession level.

The housing market is still a huge mess, too:

Note: No data available for WV and 6 other states.

Close to 10% of homeowners with mortgages have more than 25% negative equity. This is trending down slowly - the decline is apparently mostly due to homes lost in foreclosure.

Wait, you say, isn't the unemployment rate creeping down? Well... let's check the charts.

As Brad Delong says:

Count me as unimpressed with falls in the unemployment rate 100% of which are declines in labor force participation, and 0% of which are the result of increases in the employment-to-population ratio...

This is a good day to listen to Larry Summers:

A sick economy constrained by demand works very differently from a normal one.... When demand is constraining an economy, there is little to be gained from increasing potential supply... if more people seek to borrow less or save more there is reduced demand, hence fewer jobs.... After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital... consumers discover they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors. Pressure on private spending is enhanced by structural changes....

What, then, is to be done?... The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best. The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded.... [It] is a false economy to defer infrastructure maintenance and replacement, and [not to] take advantage of a moment when 10-year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment. It is far too soon for financial policy to shift towards preventing future bubbles and possible inflation, and away from assuring adequate demand...

After all,

"[T]he greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded.."