The U.S. is paying a big price in growth, jobs and wages by practicing the kind of fiscal austerity that it criticizes European nations for pursuing.
If federal, state and local governments were cutting taxes, increasing spending and expanding hiring as they did during all but one recovery since World War II, the economy would be growing 3 percent a year rather than slightly over 2 percent, the average of the past six years, according to a Bloomberg analysis of data.
Some 2.4 million more Americans would be employed, helping to push up lagging wages, the analysis estimates.
“There’s really nothing in the postwar that compares with the current expansion,” said Brookings Institution economist Barry Bosworth. “We threw in the towel on fiscal stimulus way too soon.”
The government’s role in the economy has taken on new significance in light of concerns that growth may have ground to a temporary halt in the first quarter of the year, slowing a recovery that has already taken longer than normal to reach pre-recession levels.
Opponents of using fiscal tools, especially higher government spending, focus on what they regard as a greater threat than tepid growth: federal deficits and debt. “Government can’t spend its way back to a strong economy,” said Representative Kevin Brady, a Texas Republican and member of the House Ways and Means Committee.
The Obama administration and Congress agreed in 2009 on an $830 billion stimulus plan to help break the economy’s fall during the recession that began in December 2007, then abruptly dropped the effort after growth resumed. By many measures, the federal government’s actions since then have been the most fiscally contractionary since the rapid demobilization of troops after World War II.
Bloomberg News reviewed government tax, spending and hiring data for each expansion since 1945, looking especially at those that were at least as long as the latest upswing so they could be measured at the same point in the cycle.
Among the findings:
In past long recoveries, government hiring added an average of almost 14 percent to overall job growth. This time, it has subtracted more than 6 percent.
Government consumption and investment previously contributed an average of more than a half a point to annual growth of the gross domestic product. This time, they’ve shaved off an average of a quarter of a point.
Personal income tax burdens were cut during prior recoveries by an average of 10 percent to encourage consumer spending. That’s less than the 25 percent reduction early in the current expansion. But while over half the cuts in past upswings remained in place for six or more years, well over half of the reductions this time were unwound by the end of the third year.
The nation’s retreat from tax cuts and spending increases to promote the recovery has been a bipartisan affair. Democratic President Barack Obama and Republican House Speaker John Boehner agreed in 2011 to apply the fiscal brakes by negotiating $1 trillion in spending cutbacks over 10 years and a process to impose more.
Now the driving political force is largely one party. Congressional Republicans recently passed a budget outline for next fiscal year that calls for further cuts, which the nonpartisan Congressional Budget Office estimates would knock a half-point or more off growth through 2018. Not a single Democrat backed the measure.
Brady, who is also vice chairman of the congressional Joint Economic Committee, said that even if extra spending helped growth, Washington can’t afford it because of debt. Federal debt held by the public is at its highest level relative to the size of the economy since the years immediately after World War II -- 74 percent of GDP, according to the Congressional Budget Office.
All the government can do, Brady said, is “get itself out of the way of a stronger economy” by removing regulatory and other barriers to private investment.
Fiscal policy advocates counter that with record-low interest rates borrowing is cheap and that stronger growth is the best cure for the debt.
“We’re running the most contractionary fiscal policy in the postwar era and probably longer at a time when the case for an expansionary one could not be stronger,” said J. Bradford DeLong, an economist at the University of California at Berkeley and one of the most vocal advocates of using government taxing and spending powers to boost growth.
Federal Reserve Chair Janet Yellen and her predecessor, Ben S. Bernanke, who’ve overseen the central bank’s most aggressive use ever of monetary policy to revive growth, have both decried the impact of recent fiscal practices.
Bernanke, then the Fed’s chairman, said early last year that “with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.”
The contractionary nature of the fiscal policy has been partially obscured because it’s an amalgam of government tax and spending actions at all levels -- federal, state and local -- rather than a single set of decisions.
Recent Obama administration comments about the fiscal policies of other major economies have also helped conceal the reality.
The administration has repeatedly criticized the big European nations, especially Germany, for running austerity programs of deep spending cuts and tax increases that the administration says slow their own growth and undermine the global recovery. Treasury Secretary Jacob Lew last fall urged Germany and others to “pursue more fiscal policies to boost demand.”
But figures from the Organization for Economic Cooperation and Development show that since the 2009 start of the recovery, the administration has allowed U.S. policy to tighten by more than twice as much on average as Germany, France, Italy and the U.K.
The result by last year was that Washington was running an austerity program not terribly different than a composite of its European counterparts.
Since 2008, using fiscal policy for stimulus has gotten a second look from economists -- even some conservative ones, such as Martin Feldstein, the Harvard University professor, Reagan administration chief economic adviser and longtime opponent of deficit spending.
Last year, Feldstein floated an ambitious proposal to spark stronger growth, including more than $1 trillion in deficit-financed infrastructure spending and permanent tax cuts. While he later retreated from the spending, he continues to endorse more modest tax cuts.
The renewed interest stems from the fact that economists’ two biggest concerns about fiscal policy don’t seem to apply now. The problem of timing tax cuts and spending boosts to kick in when most needed isn’t such a worry when the economy’s problems have lasted for years. And the concern that government borrowing to finance deficits will crowd out private investment and drive up interest rates simply hasn’t happened.
Most Republicans remain unmoved, even those like former Representative Tom Davis of Virginia who agree that fiscal stimulus would provide a short-term boost. The impact on the deficit is the larger worry, he says.
“I’ll take the short-term hit of being criticized for contributing to a sluggish economy to do something about these deficits,” Davis said.