Recession

The Great Recession has put enormous strain on the American social contract, exposing not only the many holes in our social safety net but also the weaknesses in its basic design and philosophy.

It has been widely reported that China has dramatically reduced its purchases of US Treasuries over the past year.  But it would be wrong to conclude that China has stopped intervening in currency markets or even that it is dumping the dollar.

The New America Foundation and Economists for Peace and Security gathered on October 1st to discuss actionable plans to deal with America's budget problems in light of high unemployment and a shaky economic recovery. Discussants offered suggestions that would allow the US to begin making changes to key budget issues such as Social Security, Medicare, and defense.

Featured experts included James K. Galbraith, Barbara Kennelly, Linda Bilmes, Lawrence Korb, and Thomas Palley among others.

The Great Recession has exposed numerous flaws in our social contract – weaknesses that existed prior to the economic downturn – highlighting the need for changes in our system. This series of policy briefs explores the stresses on our social contract, and the policy changes that must be made to mend it. The six-part series includes:

• Overview: The Great Recession exposes flaws in the American Social Contract.

Christina Romer, the outgoing chair of the president’s Council of Economic Advisors, said arguably the only positive thing you could say about employment in August: the numbers were “better than expected.”

The first step in treating a severe illness is making the correct diagnosis.  Since passing the stimulus package in early 2009, President Obama and his economics team have groped for a good explanation of why the economy remains stuck in a long-term slump, and in particular, why job growth has remained so slow.  The answers have variously been high health care costs, fiscal profligacy by the Bush administration, recklessness on Wall Street, excess dependence on foreign oil,  and a poor education system.

The single most important reason for the failure of the recovery to take hold thus far is that private credit markets are locked up, especially for small businesses.  Private business borrowing and lending is at a standstill, while private banks are holding an unprecedented $1.1 trillion in cash reserves in their Federal Reserve accounts.  In 2007, before the recession began, the banks held only $20 billion in reserves.  The 2007 figure was itself dangerously low.  But a nearly $1 trillion turnaround in bank reserve holdings is a new form of Wall Street excess.

Mr. President:

With hopes of a V- or U-shaped recovery fading, there is the increasing prospect of an L-shaped future of long stagnation, or even a W-shaped future in which W stands for something worse. The reason for this dismal outlook is economic policy is trapped by failed conventional thinking that can only deliver wage stagnation and prolonged mass unemployment.

Your administration’s current economic recovery program has been marked by four major failings:

At this year’s Jackson Hole conference for central bankers, Fed Chairman Ben Bernanke admitted that the economic recovery so far this year has been “somewhat less vigorous than we expected,” but he expressed hope that the economy would return to a more satisfactory growth rate next year.  Considering that the Fed was already projecting a markedly slower recovery than America experienced after previous deep recessions, the Fed’s economic objectives are far too modest.  Ideally, the US economy should be growing at a 5 percent rate in 2010 and 2011 to recover lost ground and get work