The combined impact of fewer workers and lower productivity is enormous. In 2008, before the true extent of the recession was known, the Congressional Budget Office (CBO) projected that by 2017 the economy’s potential would be 29 percent larger than it had been in 2007. In its most recent report, the CBO puts the economy’s potential for 2017 at just 16 percent more than its 2007 level. This difference of 13 percentage points translates into more than $2 trillion a year in today’s economy.
It’s also well worth noting that this lost output is income that disproportionately would have gone to those at the middle and bottom of the income ladder. The people who don’t get employed in a weak economy are overwhelmingly African Americans, Hispanics, and workers with less education. Furthermore, in a weak labor market, workers at the middle and bottom of the wage ladder aren’t well positioned to get wage increases. The weakness of the labor market in the Great Recession and the anemic recovery that followed were both associated with a large shift in national income from wages to profits. In short, this was a hard punch to the belly for large segments of the working population.
Is it fair to blame the severity of the recession and the weakness of the recovery on the deficit hawks? Yes. Suppose that the government had been free to spend without constraint in the years after the collapse of the housing bubble. There’s no reason to believe that with a large enough stimulus, say two or three times the actual one, we would not have quickly moved the economy back to something close to full employment. This is the story of the massive spending associated with World War II that finally got the economy out of the Great Depression.
Of course, there is enormous uncertainty about how the economy would have responded following an event as traumatic as the collapse of the housing bubble. But even if just half the lost potential can be laid at the doorstep of the deficit hawks, the impact is still enormous. The $1 trillion in lost annual output is considerably larger than the amount raised each year through Social Security taxes. Even cutting the loss in potential GDP in half, the cost to the population is equivalent to an increase in the Social Security payroll tax of 14 percentage points.
Keep this 14 percentage point hike in the payroll tax in mind. The deficit hawks would scream bloody murder over a proposal to phase in a Social Security tax increase of 2 percentage points over two decades. The deficit hawks are not much concerned about consistency. …
We should remember that we will pass down a whole society to our kids—including the natural environment that underwrites the quality of life of future generations. If the cost of ensuring that large numbers of children do not grow up in poverty and that the planet is not destroyed by global warming is a somewhat higher current or future tax burden, that hardly seems like a bad deal—especially if the burden is apportioned fairly. Now suppose, by contrast, that we hand our kids a country in which large segments of the population are unhealthy and uneducated and the environment has been devastated by global warming, but we have managed to pay off the national debt. That is, after all, the future that many in the mainstream of the economics profession are prescribing for the country. Somehow, I don’t see future generations thanking us.
The Wrongest Profession