Chairman Brady, Vice Chair Klobuchar, and members of the Committee, I am pleased to be appearing before you today to discuss the state of the economy, my evaluation of U.S. economic policy, and my suggestions for policies to strengthen economic growth.
The economy remains mired in an anemic recovery from the financial crisis and recession, which was as or more severe than any economic shock since World War II. Unemployment soared, long-term unemployment became entrenched, many more left the labor force, investment plummeted. There were many interrelated causes: the burst housing bubble foremost among them. Two prime causes of the bubble were the serial social engineering of housing and too-loose monetary policy during a boom. Home prices plummeted and housing construction collapsed. The problems spread to other sectors of the economy.
The government undertook unprecedented monetary, fiscal and regulatory responses to the crisis; I believe some were quite helpful, especially early monetary policy, the automatic fiscal stabilizers, and, while done poorly, the capital made available to the banks. Absent those interventions, I believe the downturn would have been worse.
The unprecedented anemic recovery has been almost as damaging as the recession. Usually recoveries from deep recession are sharp and swift, as in the 1970s and 1980s. Sometimes recoveries from financial crises are slow, though not always. The economy remains well below its potential (Figure 1). Economic growth has averaged roughly 2% per year since the recession ended. Last quarter the economy was essentially flat, and this quarter the Blue Chip forecast again calls for anemic growth (Figure 2).
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