PERSPECTIVE A Progressive Growth Strategy for the USA JOSH BIVENS AND HILARY WETHING October 2013 The US economy faces pressing challenges in the short, medium and long term. For the short term, the key policy intervention should be a large increase in public spend­ing. While targeted income transfers can be useful for stabilization, large-scale public investment projects to boost jobs and growth in the near-term have the added advantage of boosting long-term productivity as well. For the medium term, the key policy intervention should be the aggressive maintenance of full employment, a significant increase in top marginal tax rates and the bolstering of labor market institutions that enhance the bargaining power of low- and middle-income workers (particularly a large increase in the minimum wage and labour law reform that allows willing workers to form unions). For the long term, the key policy interventions should be to raise the cost of GHG pollution faced by emitters, a reduction in average working hours and efforts – both regulatory and through direct spending – to increase in­vestment in efficiency and carbon mitigation. The Short-term Challenge: Full Recovery from the Great Recession June of 2013 marked four full years since the Great Re­cession officially ended, yet full recovery from the Great Recession had not yet happened and it is assuredly not guaranteed. Many economic indicators are better than they were two or three years ago: the unemployment rate in May 2013, for example, was a full 2.4 percentage points lower than its peak in October 2009. However, most of the reduction over this time period has not been driven by a jobs boom, but by a reduction in the labor force participation rate. The 81.8 per cent peak in this measure reached in 2000 was never reached again. At the four-year mark of recov­ery it had recovered less than a percentage point and sat at 75.9 per cent. Given how much further the economy still has to grow to get the labour market back to full health, it is distress­ing that policymakers in both parties have turned far too quickly away from addressing the crisis of joblessness and towards addressing the purely hypothetical menace of large budget deficits. The clearest signal that deficits do not pose a pressing danger is that interest rates remained at historic lows even as deficits rose and even as the Great Recession officially ended. What this clearly indi­cates is that the US economy remains severely demand­constrained, and that extraordinarily accommodative monetary policy will not spur a full recovery on its own. The freedom from speculative attack enjoyed by the United States means that fiscal policy has been nowhere near as contractionary in the past three years as it has been throughout the Eurozone. Nevertheless, it still clearly fails to meet the need to fill the»output gap« between actual output and what could be produced if all idle resources(including workers) were employed. Government spending has also fallen far behind even the more modest benchmark set by the historical record of past recoveries which needed government spending much less than the current one. If the average trajec­tory of government spending during the previous three recoveries had been sustained in the past four years, the output gap would nearly be closed today and the unem­ployment rate would be much closer to 5 per cent than today’s 7.6 per cent. 1 1. For more details on public spending in the current recovery relative to historical trends see Josh Bivens and Heidi Shierholz(2013): How Much Has Austerity Held Back Recovery So Far? Economic Policy Institute.