Economic Crisis All Over Again
MIT Department of Urban Studies and PlanningStata CenterCambridge, MA
Barry BluestoneDean, School of Social Science, Urban Affairs, and Public Policy
February 17, 2009
The 1970s - Troubled The 1970s - Troubled TimesTimes OPEC and the Energy CrisisOPEC and the Energy Crisis Declining Productivity; Sluggish Declining Productivity; Sluggish
Growth, Rising UnemploymentGrowth, Rising Unemployment Wage Declines, Stagnant Family Wage Declines, Stagnant Family
IncomesIncomes Growing InequalityGrowing Inequality
The 1980sThe 1980s
Supply Side EconomicsSupply Side Economics Massive Tax Cut/Massive DOD Massive Tax Cut/Massive DOD
BuildupBuildup Growing Federal DeficitsGrowing Federal Deficits DeregulationDeregulation PrivatizationPrivatization Rising Inequality Rising Inequality
0%
1%
2%
3%
4%
5%
Ave
rag
e A
nn
ua
l G
row
th R
ate
1959-1969 1969-1979 1979-1989 1989-1995
4.4%
3.2% 3.0%
2.3%
Revised GDP Growth Rates1959-1995
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Annual U
nem
plo
ym
ent R
ate
1960s 1970's 1980's
5.3%
6.2%
7.3%
Average Unemployment RateUnited States 1960-1989
Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Ave
rag
e A
nn
ua
l G
row
th
1949-1959 1959-1969 1969-1973 1973-1979 1979-1989 1989-1995
3.4%
3.1% 3.1%
1.3%1.2% 1.1%
Labor Productivity Growth1949-1995
Source: for 1949-59, Krugman, Age of Diminished Expectations; 1959-99, Economic Report of the President, 2000.Growth in Output per hour of work in Business Sector
Figure 3.1
1949-1973 1973-1995
-1%
0%
1%
2%
Annual P
erc
ent C
hange
Lowest 20%Lower Middle
MiddleUpper Middle
Top 20%
-0.6%
-0.2%
0.2%
0.5%
1.3%
How Family Income Grew1973-1995
Figure 6.2
Source: U.S. Department of Labor
Why Prosperity Ended?Why Prosperity Ended?The Conventional WisdomThe Conventional Wisdom
Oil CrisisOil Crisis Strong unions generate Wage-Price SpiralStrong unions generate Wage-Price Spiral Mushrooming Federal DeficitsMushrooming Federal Deficits Inflationary PressuresInflationary Pressures Falling Family Saving RatesFalling Family Saving Rates Too much Government RegulationToo much Government Regulation Too much Social Welfare SpendingToo much Social Welfare Spending Corporate Myopia in face of Import Corporate Myopia in face of Import
ChallengeChallenge
Prosperity Regained
1995-2000
0%
1%
2%
3%
4%
5%
Ave
rag
e A
nn
ua
l G
row
th R
ate
1959-19691969-19791979-19891989-19951995-1999
4.4%
3.2% 3.0%
2.3%
4.5%
Revised GDP Growth Rates1959-1999:III
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Annual U
nem
plo
ym
ent R
ate
1960s 1970's 1980's 1990-95 1996-98
5.3%
6.2%
7.3%
6.4%
4.9%
Average Unemployment RateUnited States 1960-1998(II)
Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics
Figure 4
Wall Street Model PoliciesWall Street Model Policies
Tight monetary policy to keep Tight monetary policy to keep inflation under controlinflation under control
Deficit Reduction/Surplus Generation Deficit Reduction/Surplus Generation to raise aggregate savings rateto raise aggregate savings rate
Free Trade to keep prices downFree Trade to keep prices down Weak Trade Unions to keep wages Weak Trade Unions to keep wages
downdown Welfare Reform aimed at increasing Welfare Reform aimed at increasing
labor supplylabor supply
The Wall Street Model of Growth
RisingStockPrices
SubduedInflation
IncreasedWealth
IncreasedSpending
OutputGrowth
IncreasedCorporate
Profit
VirtuousCycleTechnological
Innovation
Wall StreetVirtuous Cycle
IncreasedCapital
Investment
ImprovedProductivity
Figure 1.2
SubduedInflation
FallingInterestRates
FallingInterestRates
IncreasedSavings
IncreasedSavings
The Wall Street Model
You Live by the Wall Street Model … You die by the Wall Street Model
Based on stock market appreciation Focus on financial transactions, not real
production of goods and services Casino Society Massive Debt – Government,
Households, Foreign Massive Redistribution of Income and
wealth ... CREATES MASSIVE INSTABILITY
3.6%
3.1%2.9%
2.2%
0.0%
-0.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2004 2005 2006 2007 2008:I 2009 (est)
Real GDP Growth Rate 2004-2009
5,481,000
9,266,000
6,688,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
Civilian Unemployment (January 1998 - January 2009) (in 000s)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
11,616,000
3.8%
6.3%
4.4%
7.2%
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
Civilian Unemployment Rate (1998-2008)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
January 2009: 7.6%
Loss in Employment (December 2007-December 2008)
Change in Employment
Percentage Change
Construction -632,000 -8.5%
Manufacturing -791,000 -5.7%
Retail Trade -522,000 -3.4%
Financial Services -148,000 -1.8%
Temp Services -490,000 -19.0%
$50,782
$52,173
$53,349
$54,127
$55,823
$57,734
$59,088$59,398
$58,545$57,920 $57,751 $57,705
$58,036$58,407
$57,648
$46,000
$48,000
$50,000
$52,000
$54,000
$56,000
$58,000
$60,000
$62,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Real Median Family Income ($2006)
24 25 2435
5060
120
100
300
148
250
275
0
50
100
150
200
250
300
350
1965 1970 1975 1980 1985 1990 1993 1995 2000 2003 2005 2007
Pay Ratio: Chief Executives of American Companies/Average Worker's Salary
U.S. Personal Savings Rate (1998-2008:I)
4.3%
2.3%2.1%
0.4%0.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1998 2000 2004 2007 2008:I
Personal Savings Rates Plummeting
-$215
-$301
-$417-$384
-$461
-$523
-$624
-$728
-$788
-$731-$704
-$900
-$800
-$700
-$600
-$500
-$400
-$300
-$200
-$100
$0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Balance of Trade ($B)
U.S. Federal Debt (in $billions)(1940-2009)
$50.7$260.1 $290.5 $380.9
$909.0
$4,001.8
$5,628.7
$7,905.3
$8,950.7
$10,413.4
$0.0
$2,000.0
$4,000.0
$6,000.0
$8,000.0
$10,000.0
$12,000.0
1940 1945 1960 '1970 1980 1992 2000 2005 2007 2009 (Est.)
Federal Debt nearly double since 2000
The Debt Bomb With massive personal debt, federal
debt, and adverse balance of trade With the Wall Street psychology of
quasi-Ponzi schemes, the tinderbox was set for ignition
The unraveling of the subprime mortgage market was the spark that set in motion the economic collapse we have experienced
Economic Collapse Massive Foreclosures Massive Wealth Effect … with personal
portfolios in free-fall Translation of financial collapse into real
economy … with sharp cutbacks in demand and consequently sharp increases in unemployment
Now states and cities in free fall, adding to the crisis
Vicious Circle … with a stimulus package perhaps not large enough or soon enough to keep unemployment from reaching 10 percent by late this year
A Better Stimulus Package
What Really Needs to be Done? – National Economy
Phase I – Instant Stimulus “Uncle Sam” Debit Card Home Price Insurance System
Phase II – Short-term Stimulus Massive General State and Local
Revenue Sharing Extended Unemployment Benefits
Phase III – Longer-term Stimulus Public Infrastructure Investment