What Destroyed the Economic Recovery? President Obama's First Two Budgets Predicted Three Years of Robust Economic Growth, but That Didn't Happen. So What Happened to the Economic Recovery This Time?

By Eddlem, Thomas R. | The New American, October 8, 2012 | Go to article overview

What Destroyed the Economic Recovery? President Obama's First Two Budgets Predicted Three Years of Robust Economic Growth, but That Didn't Happen. So What Happened to the Economic Recovery This Time?


Eddlem, Thomas R., The New American


When President Obama submitted his first two budget proposals to Congress in early 2009 and 2010, he included assumptions that the recession would be foll7wed by three years of economic growth approaching four percent per year.

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The growth never materialized.

After shrinking in 2008 and 2009, the U.S. economy instead grew at an anemic 2.4 percent of gross domestic product (GDP) in 2010. Even weaker growth ensued in 2011, just 1.8 percent of GDP, which has also been the rate of growth for the first two quarters of 2012. That's just a bit better than production needed to account for population growth and, obviously, not enough to bring unemployment levels below the eight-percent mark.

Obama's rosy economic projections of 2009 and 2010 were not pulled out of thin air. The White House's Office of Management and Budget had simply projected growth rates by compiling an average growth rate during post World War II recoveries after a recession. During the Reagan-era recovery years, economic growth averaged 4.3 percent annually for seven years after a recession where unemployment had soared even higher than the highest levels of the current recession. What Obama projected was by no means unrealistic.

So what happened to the economic recovery this time?

There are competing schools of thought about why the economy failed to grow as forecast after the recession, each with mutually exclusive conclusions about what ought to be done.

Not Enough Demand

The establishment Keynesian school of economics--the dominant economic school of thought in government and academia for a generation claims that government spending is needed to lift an economy out of a recession by stimulating reticent consumer demand. The key equation for Keynesians is the formula by the school's founding father, British economist John Maynard Keynes, for aggregate demand: C+I+G=Y

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The formula attempts to extract the elements of demand for goods in an economy, and means this: C (consumption) plus I (investment) plus G (government spending) equals Y (total demand). Keynes posited that consumers trim back consumption spending in a recession, which leads to pull-backs by producers, which leads to more layoffs and another wave of reduced consumption by consumers. Keynes called this theoretical private-sector economic death spiral a "liquidity trap" because consumers hang onto their cash and withdraw from markets in a panic. Keynes said that in order to stop a liquidity trap, government needs to step in with higher spending--boosting total demand and restoring consumer confidence and consumption spending.

Yale University Professor Robert Shiller--an economist who was one of the few Keynesians to predict the housing bubble and bust of 2002-2008--called massive government "stimulus" spending during the recession a grand Keynesian "experiment." He told CNBC reporters from the Davos Economic Summit on January 28, 2010, "The recent recovery was a wonderful experiment in Keynesian economics, but there isn't uniform support for these things. One thing is that people start to worry about the debt incurred and that can cause a backlash--a political backlash--that would stop any further such efforts, even if they are still needed." Shiller also tentatively projected for his audience that there would be about five or more years of sluggish growth, rather than a robust recovery. "I just don't see this going away soon. I'm not saying we're in for a depression." Shiller made this prediction because he believed that the positive effects he attributed to government spending increases would be offset by fiscal austerity measures the following years.

Shiller's fear was the opposite of the Austrian free-market school of economics, as Shiller wanted to maintain government spending increases for several years into the recovery in order to make it a robust--rather than a lackluster--recovery. …

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