The US economy has faced three “Greats” since the early twentieth century: the Great Depression of the 1930s; the Great Inflation of the 1970s; and the Great Recession of the late 2010s. My colleagues at the college saw me as a harbinger of bad days because I joined here in 2007, whose December marked the beginning of the Great Recession in the US. The tenth anniversary of the recession now tells us a different story. The US economy has turned back. The last quarter posted three percent growth—much higher than their long-term two percent growth. US GDP has crossed the USD 19 trillion mark for a population size of 326 million, making per capita income USD 59,000 annually. Very soon, the largest economy in the world is going to touch its potential output line after a full decade of underperformance.
Good luck to Americans. They had a great leader in President Obama who won the election in late 2008. Seldom has the nation seen such a passionate leader who wouldn't spend a single day without brainstorming on how to make the US economy the strongest again.
President Obama often invited economist Ben Bernanke, who was the then central bank chair, to places where they could pass evenings quietly talking over the economy. The council of economic advisers kept on meeting the president routinely. Economist Robert Barro argued that the theory on spending multiplier (if the government spending rises by one dollar, output rises by more than double or so) was not working in the economy. Economist Paul Krugman counterattacked and insisted on the government to stick to Keynesian economics that encourages aggressively raising government investment in the absence of robust private investment to defuse further collapse in the aggregate demand. None of the economists faced displeasure from the government for being so critical of the regime. Academics began to interact with students and new topics on the crisis emerged at universities. Grants for research on the recession also piled up.
The momentum of the danger, nevertheless, was hard to resist. Unemployment rose to as high as ten percent—quite unusual for the US economy whose natural rate of unemployment is around five percent. The education sector stopped hiring. The housing bubble that had formed burst terribly in 2008, sending the whole US financial system into a free fall. The government, which otherwise believes in the free market and less interference from the state, resorted to pronouncing the theory of “too-big-to-fail” and the Federal Reserve rescued the collapsing financial elephants by injecting emergency-time liquidity.
The Fed Chair Bernanke went as far as to warn President Obama sometime in October 2008 that if Obama doesn't act as per the Fed's wishes on Friday, there will be no economy on the following Monday. And the president complied promptly with that kind of a strong recommendation, rescuing the largest economy from an otherwise certain catastrophe. At the very onset of the gloomy days in 2008, economists predicted that the US would face the worst financial crisis since the Great Depression. But President Obama saved the nation by engaging a strong pool of ground-to-earth economists, brave policymakers, and conscientious politicians together.
The leadership says much of the story of why President Obama left the White House in January this year with one of the highest approval ratings from US citizens. Usually, outgoing presidents are always unpopular. Obama reversed that trend by working tirelessly for the economy and saving the world from further debacle. His energy policy changed America forever by making the US gradually more dependent on natural sources of power and, thus, relying less on the Middle East, dampening the future of oil-sparked political tensions. Now we see more energy efficient cars running on US roads and highways, reducing the fuel cost per family and helping consumption, and finally, serving justice to the environment.
The current unemployment rate, 4.2 percent, is the lowest in more than a decade and much lower than the natural rate of five percent. Still, it will be hard to say that the economy is overheated because 1) actual output is still slightly below the potential line, and 2) inflation remains as low as 1.5 percent—lower than the Fed's implied target of two percent. As a result, economists at the Fed will have heated debate on whether the policy rate should be raised or kept the same at 1.25 percent.
Seven directors from the Fed and five governors out of twelve regional Fed governors will give their opinion. Some of them are publicly advocating for not raising the Fed policy rate right now because of weak inflation and the strong dollar. A rate rise may further lower inflation sending it to the danger zone of deflation (negative inflation) that lies at the root of Japan's debility for twenty years. A rise in the US policy rate is likely to strengthen the US dollar against all major currencies such as yuan, euro, yen, rupee, and pound, making US goods more expensive than before and, thus, discouraging US exports overseas.
A few days ago, Richard Peach, senior vice-president of the Federal Reserve of New York, came to our campus to speak on the future stance of the Fed. As a macroeconomist, he is assigned to educate students and professors on monetary policy and the state of the economy. He takes lessons and suggestions from the academia to intellectually connect the US central bank with the people. In contrast, our public institutions including the central bank are advised to remain as non-public and as secret as possible, as if they are conducting wartime military operations on the public.
This culture breeds inefficiency and a festival of mediocrities at our public institutions. The US economy leaves a lesson to correct this culture. Active consultation and policymaking by engaging public officials and academics can help even a giant economy to recover from a doomsday-like scenario. The US economy leaves this lesson for the world to learn from, on the tenth anniversary of its Great Recession.
Biru Paksha Paul is associate professor of economics at the State University of New York at Cortland. Email: firstname.lastname@example.org