Slow Recovery Without Continued Policy Interventions

Testimony Before the Consensus Revenue Hearing, Senate and House Ways and Means Committees in Massachusetts

SOURCE: Center for American Progress

CAP Senior Fellow Christian E. Weller testifies before the Senate and House Ways and Means Committees in Massachusetts. Read the testimony (CAPAction).

The U.S. economy is on the mend. Economic growth returned in the middle of 2009, reversing course after the worst recession since the Great Depression.

The economic recovery that has since ensued has been remarkably weak. Economic growth has not been strong enough nationally to propel job growth to the levels necessary to reduce the unemployment rate.

A number of factors hold back growth. Chief among these factors is slow consumption growth. Consumers do not have sufficient resources to spend more money since they are rebuilding their lost wealth and are focusing on reducing their debt burden. Household deleveraging will likely continue into the second half of this decade, slowing consumption and economic growth. State and local government budget deficits and large trade deficits also contribute to the current slow growth pattern.

The Massachusetts economy performs comparatively better than the rest of the country. Its unemployment rate has stayed below the national average and has fallen faster than has been the case elsewhere. Still, with more than 8 percent of the population out of work, the unemployment rate won’t fall substantially without a stronger recovery in other parts of the country.

A stronger recovery in the near term, though, will depend in large measure on the success of public policy interventions, considering the formidable obstacles to a strong, self-sustaining recovery. The federal government’s initial economic stabilization measures, the American Recovery and Reinvestment Act of 2009 (ARRA) is slowly winding down. It will in all likelihood be replaced by a series of tax and spending measures targeted at boosting personal incomes and consumption under the Middle Class Tax Relief Act of 2010.

The economy is expected to see most of the gains from this new stimulus effort in 2011. Economic forecasters put the additional growth from the combination of new spending and tax cut measures generally at about one percentage point for 2011. The additional growth effect in 2012 will likely be substantially smaller than that since the measures most likely to generate growth are limited to 2011.

Massachusetts will likely gain an equal or smaller amount in economic growth from the new stimulus. Massachusetts has fewer unemployed workers than the rest of the country and thus will not be able to take as much advantage of the new spending dedicated to extended unemployment insurance benefits. Moreover, public-sector employees in Massachusetts contribute to state and local government retirement systems instead of Social Security. The payroll tax holiday—a cut of the Social Security payroll tax for one year—that is part of the new policy measure will thus have a smaller effect in Massachusetts than in most other states. Massachusetts may lose more than $300 million in potential economic stimulus because this provision excludes public-sector workers here. The contribution to economic growth from the new spending and tax measures will consequently be equal or less in Massachusetts than in the rest of the country.

CAP Senior Fellow Christian E. Weller testifies before the Senate and House Ways and Means Committees in Massachusetts. Read the testimony (CAPAction).