1. 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 jirons@epi.org 1

2. 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

3. 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

4. Scarring EducationLost economic opportunities Private investment Entrepreneurial activity – new businesses long-lasting damage 4

5. EDUCATION Human capital is key to growth 5

6. 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

7. OPPORTUNITY Incomes, poverty, and jobs 7

8. Opportunity: Income loss/poverty EPI Projections 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

9. Opportunity: Costs of Poverty Holtzer et al. (2007) 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

10. Opportunity: Displaced Workers Farber (2005) displaced workers survey: “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

11. Opportunity: New entrants Kahn (2009) “…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

12. Opportunity: Generations Oreopoulos et al. (2005) 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

13. Intergenerational Mobility: College 13

14. INVESTMENT Physical capital, technology 14

15. Private investment 15

16. Private investment Total non-residential investment down by 20% from peak levels through the second quarter of 2009. 16

17. NEW BUSINESSES Innovation, growth, jobs 17

18. 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

19. SUMMARY: SCARRING 19

20. 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

21. COSTS/BENEFITS OF ACTION 21

22. Impact 2009 Recovery Act is having an impact GDP contraction has slowed Job loss has slowed Recession over? Stimulus will create a boost to GDP and job creation in the immediate future 22

23. Projected impact on GDP 23

24. Long-term costs: Example Consider $100 billion/1-year increase in stimulus spending Over the next 10 years, federal revenue would increase by a cumulative $25 billion over baseline, offsetting a portion of the cost of the stimulus. Additional interest expenses would total $18 billion over the next decade. Over time, as the economy grows, the additional interest payments will fall relative to the economy’s size: Additional annual interest costs would fall to just 0.01% of GDP after 10 years. The benefit to the overall economy over this time, however, would be approximately $154 billion in present value terms, 24

25. 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

26. GENERATING A ROBUST RECOVERY 26

27. 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

28. Recovery Package: Helped the Economy? “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 65% say Recovery package has helped

29. Has the Obama administration done enough to deal with unemployment? “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

30. Additional Policy Action Unemployment Insurance COBRA subsidies Extend expiring provisions Include localities Additional Aid to states Direct employment programs Job creation tax credit Job creation Nutrition assistance, school infrastructure, one-time payments to seniors, Pell grant boost, tax incentives for energy conservation, etc. Expansion of other elements Appropriations/FY2010 budget 30

31. State Fiscal Gaps 31

32. 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 long- run health of the economy. Fiscal costs of recovery policies should be thought about as long-term investments. 32

33. Economic Policy Institute Economic Scarring Wednesday, September 30, 2009 John S. Irons, Ph.D. Economic Policy Institute Washington, DC jirons@epi.org 33