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Hindsight is 20-20 on nation's lagging economic recovery

WASHINGTON — It's time to admit something: The economy is not recovering. It is, if anything, unrecovering.

We've added an average of 119,000 jobs a month since January. That's better than the 78,000 new jobs the economy averaged per month in 2010. But it's barely enough to keep up with population growth and not nearly enough to cut into the unemployment rate. And over the past three months, it has fallen to 96,000 per month.

According to Macroeconomic Advisers, growth for the rest of the year is tracking at about 2.4 percent — not nearly enough to bring down the jobless rate. Forecasters uniformly believe that another recession, perhaps driven by events in Europe, is a real possibility. And new data out of the Census Bureau show that median incomes have fallen by almost 10 percent over the past three years.

But why? For the past few months, I have been pestering every economist and economic policymaker I can think of with the same question: Could the recovery have been substantially different? Could unemployment today be substantially lower, growth substantially quicker, incomes substantially higher?

Here are some of my conclusions, based on replies to my inquiries:

The stimulus program needed to be bigger. But there were two problems with bigger: Congress wouldn't have gone for it, and the administration probably couldn't have spent it effectively. Tax cuts, which can be done quickly and at any size, aren't very stimulative because the money gets saved rather than spent. And infrastructure investment, which is very stimulative, can't be ramped up quickly.

But it could have been longer. The stimulus was a two-year shot, and it was too small even before we knew that the recession was larger than it initially appeared. If the White House had better understood the likely length of the recession and designed the stimulus funds to be spent over four years, it could have included a larger and smarter infrastructure component and tied the size and duration of the tax cuts, unemployment benefits and state and local aid to the unemployment rate.

In all likelihood, however, Congress would have objected to setting fiscal policy for 2012 in 2009.

Housing is a clearer case of the administration failing to get anything near the boundaries of the possible. The administration would have been wise to push legislation allowing bankruptcy judges to reduce mortgage principal.

The game changer, however, would have been massive debt forgiveness. This could have been done through a federal program to purchase troubled mortgages and give homeowners better rates. But the politics of using taxpayer dollars to pay off mortgages were horrible. How do you explain to people who decided against buying homes they couldn't afford that they're now paying the mortgages of those who made the opposite decision?

The stimulus lacked policies to either save jobs or create them directly. In the first case, we could have taken a page out of the German playbook and launched a program to pay employers who cut hours rather than fire workers. In the second case, the government could have provided more help to state and local governments, which have lost more than 500,000 jobs.

Finally, the Federal Reserve acted with extraordinary speed and aggressiveness to prevent the crisis from becoming a calamity. The Fed has been more tentative in its efforts to speed the recovery. A more aggressive Federal Reserve could have used everything from jawboning the market to purchasing larger quantities of housing and corporate bonds to ending interest payments for banks that are simply socking away the money.

Hindsight is 20-20 on nation's lagging economic recovery 10/12/11 [Last modified: Thursday, October 13, 2011 12:39am]
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