Download Economic Policy Institute Green Infrastructure Assessing

Economic Policy Institute
Economic Scarring
Assessing the possible long-term impacts of the recession
Wednesday, September 30, 2009
John S. Irons, Ph.D.
Economic Policy Institute; Washington, DC
[email protected]
1
Overview
Recessions have long-term economic consequences
• Examples from the literature
How to think about costs/benefits of stimulus:
• Simple illustrative example.
Do more?
2
Short-term-ism
The consequences of high unemployment, falling
incomes, and reduced economic activity can have
lasting consequences.
• Job loss and falling incomes can force families to delay or forgo a
college education for their children.
• Frozen credit markets and depressed consumer spending can stop
the creation of otherwise vibrant small businesses.
• Larger companies may delay or reduce spending on R&D.
3
Scarring
Education
Lost economic opportunities
long-lasting damage
Private investment
Entrepreneurial activity – new
businesses
4
Human capital is key to growth
EDUCATION
5
Educational achievement
Early childhood education
and nutrition
• In 2007, 13 million U.S.
households, including
12.7 million children,
experienced “food
insecurity”—or difficulty
providing enough food
for all family members;
(Nord et al. 2008).
Supportive leaning
environment
• Lacking health insurance
in 2008: 46.3 million,
with over 7 million kids
under the age of 18
uninsured (U.S. Census
2009).
• Poverty (over 14 million
kids in 2008)
• foreclosures (4.3% of
mortgage loans in the
foreclosure process).
Higher Education
• A recent survey of young
adults found that 20%
age 18-29 have left or
delayed college
(Greenberg and Keating
2009).
6
Incomes, poverty, and jobs
OPPORTUNITY
7
EPI Projections
Opportunity: Income loss/poverty
• From 2007-2010:
• Average income in middle 20%: down by
$4,800
• Poverty rate: up 2.6 pp to 15.1%;
• Child poverty: up 8.6 pp to 26.6%
8
Holtzer et al. (2007)
Opportunity: Costs of Poverty
• The cumulative costs to the economy of childhood
poverty estimated to be at least $500 billion per year, or
about 4% of GDP. (incl. lost earnings, crime, health
outcomes).
• The recent increase in child poverty rates would
increase this costs by about half.
9
displaced workers survey:
Farber (2005)
Opportunity: Displaced Workers
• “about 35% of job losers are not employed at the subsequent
survey date;
• about 13% re-employed full-time job losers are holding part-time
jobs;
• full-time job losers who find new full-time jobs earn about 13
percent less on average on their new jobs than on the lost job…”
10
Kahn (2009)
Opportunity: New entrants
• “…the labor market consequences
of graduating from college in a bad
economy are large, negative, and
persistent.”
• initial wage loss of 6% to 7% for
each 1 percentage point increase
in the unemployment rate, and
• even after 15 years, the wage loss
is still 2.5%.
• Non-college graduates are likely to
fare worse.
• While unemployment in the most
recent recession has increased for
all groups, those with less
education and those with lower
incomes face much higher rates
than others.
11
Oreopoulos et al.
(2005)
Opportunity: Generations
• Labor market earnings of children whose fathers
experienced a job loss are less than similar children
whose father did not experience unemployment.
• Not only did the job loss lead to a persistent loss in
family income, but the next generation also had
earnings 9% lower than similar children
12
Intergenerational Mobility: College
13
Physical capital, technology
INVESTMENT
14
Private investment
15
Private investment
Total non-residential
investment
down by 20% from peak levels
through the second quarter of
2009.
16
Innovation, growth, jobs
NEW BUSINESSES
17
Entrepreneurial activity and business formation
Bankruptcy
• In 2008, 43,500 businesses filed for bankruptcy,
up from 28,300 businesses in 2007 and more than
double the 19,700 filings in 2006.
IPOs
• Only 21 active firms had an initial public offering
in 2008, down from an average of 163 in the four
years prior.
18
SUMMARY: SCARRING
19
Summary
A recession, therefore, should not be thought of as a
one-time event that stresses individuals and families
for a couple of years.
Rather, economic downturns will impact the future
prospects of all family members, including children,
and will have consequences for years to come.
20
COSTS/BENEFITS OF ACTION
21
Impact
Stimulus will • 2009 Recovery Act is having
create a boost
an impact
to GDP and
• GDP contraction has slowed
job creation in
• Job loss has slowed
the immediate
•
Recession
over?
future
22
Projected impact on GDP
23
GDP boost and Interest Costs
• Deficit financing
means any costs are
delayed, and spread
out over a number
of years.
• Recovery spending
should be viewed as
a long-term
investment
25
GENERATING A ROBUST RECOVERY
26
Robust Recovery
Should more be done to create jobs?
• It’s needed.
• If the recovery follows the same track as the last 2 recessions,
the unemployment rate will remain above 8% through 2014
• Unemployment rate projected to average 10% in 2010
(Economy.com)
• People want it.
27
Recovery Package: Helped the Economy?
hurt the Not sure a lot
economy
2%
12%
16%
65% say Recovery
package has helped
no effect
17%
a little
53%
•
“Earlier this year, Congress passed and President Obama signed into law the seven-hundred-eighty-seven-billion-dollar economic recovery bill, also known as the
stimulus package, that increased spending for infrastructure projects and education, gave tax cuts to ninety-five percent of taxpayers, provided aid to state and local
governments, and provided assistance to people who had lost their jobs. Do you think that this economic recovery bill has helped the economy a lot, helped the
economy a little, has had no effect on the economy, or has hurt the economy?” - Hart Research Associates/EPI poll of registered voters, September 30, 2009.
28
Has the Obama administration done enough to
deal with unemployment?
still needs
to do more
81%
done
enough
13%
Not sure
6%
•
“Do you think that the Obama administration has already done enough to deal with unemployment and the loss of jobs, or do you think
that the Obama administration still needs to do more to deal with unemployment and the loss of jobs?” - Hart Research Associates/EPI
poll of registered voters, September 30, 2009.
29
Additional Policy Action
Extend expiring provisions
Additional Aid to states
Job creation
Expansion of other elements
• Unemployment Insurance
• COBRA subsidies
• Include localities
• Direct employment programs
• Job creation tax credit
• Nutrition assistance, school infrastructure, one-time payments to seniors,
Pell grant boost, tax incentives for energy conservation, etc.
Appropriations/FY2010
budget
30
State Fiscal Gaps
State Fiscal Crisis, SFY09-10, in billions
Budget Shortfall
State Fiscal Relief (ARRA)
$168
$113
$47
$31
2009
2010
31
Conclusion
Recessions have a
lasting impact on
the economy and
create a drag on
economic growth
for years and even
generations.
Efforts to stimulate
the economy are
thus not just about
the “short-run” but
also about the longrun health of the
economy.
Fiscal costs of
recovery policies
should be thought
about as long-term
investments.
32
Economic Policy Institute
Economic Scarring
Wednesday, September 30, 2009
John S. Irons, Ph.D.
Economic Policy Institute
Washington, DC
[email protected]
33