Worst Recovery from Recession Due to Insufficient Government Spending and Effective Demand

Eric Morath of the Wall Street Journal notes that this post-Great Recession period is the slowest, least effective recovery in modern economic history.[1] “In terms of average annual growth,” he writes, “the pace of this expansion has been by far the weakest of any since 1949.”[2] The Economic Policy Institute agrees with his assessment, as do I; but they cite a specific cause of the slow recovery: a quantitative lack of state investment.[3] As EPI notes:

“During a recession, changes in government spending have a “multiplier effect” on output and income: each dollar of additional spending increases—and each dollar cut spending decreases—GDP by much more than one dollar. The Great Recession of 2008-2009 was the worst on record since the Great Depression of the 1930s, in terms of both total decline in real GDP, and total increase in the unemployment rate between the previous peak and the beginning of the subsequent recovery. The economy was in a very deep hole in 2009, and had we spent the way we did after previous recessions, we would have experienced substantial increase in GDP since then. Instead, cuts in government spending over the last eight years have had a pernicious, negative impact on output and income, as well as on jobs and wages, which depend on the level of spending in the economy. If it weren’t for these cuts, the economy would likely be fully recovered by now, and the expansion would have equaled or exceeded the Bush recovery.”[4]

The data they provide confirms this analysis:

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“Meanwhile, Figure B compares data on the total size of each expansion with changes in total government spending in each period. If government spending had increased by 11.7 percent, as it did during the Bush recovery of 2001-2007, the present expansion, which was constrained by a 6.1% decline in government spending, would easily have exceeded the size of the Bush expansion. If government spending had increased by 33.5 percent, as it did during the Reagan recovery (1982-1990), then the Obama recovery would surely rank as one of the strongest on record. We would be enjoying true full employment and rapid GDP growth, as we did in the late 1980s.”[5]

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I’d agree with their analysis, there certainly is a significant lack of state investment. However, I’d like to add an additional dynamic to this scenario. Wages of workers are insufficient to stimulate an effective demand for domestically produced commodities. Essentially, people don’t possess a sufficient income to afford commodities purchased in the First World (United States). Costs of production are much higher due to a moderate level of exploitation compared to Third World level super-exploitation. The prices of domestic commodities reflect such a difference in production cost. Since wages have not kept up with inflation, the general purchasing power of Americans has fallen behind. A good way of demonstrating this is by looking at the percentage of the GDP that comprise worker’s wages.

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Marxist economics teach us that physical commodity production is what generates value in capitalist society. The money paid out in wages and industrial business profits is the value which expands an economy. They are what give purchasing power to the economy to purchase the goods and services it provides. The problem is that such manufacturing work has been decimated by the parasitic financial industry which is taking larger and larger portions of the GDP in comparison. In addition to this, the falling rate of profit which has forced manufacturing overseas. This has led to a lack of purchasing power by American workers to purchase their own goods which would stimulate a recovery – an actual stimulation in value creation.

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We must understand that the financial sector has a destructive influence upon manufacturing and worker’s wages. Credit alone seeks to dip its hands into value creation as much as it can to siphon off value for itself; essentially in the end, undermining the ability of an economy to produce value. Credit is created to allow the industrial capitalist to begin production. However, by the “magic of compound interest,” the financial sector eats into the profits of the industrial capitalist as much as it can. The same is done with consumer credit, and the financialization of workers’ retirement savings in the form of 401Ks.

Not only do we have a lack of state investment, but we also have a lack of effective demand due to the financialization of the economy, one that is parasitic. In addition to this, we have the necessity of exporting jobs. Marx warned that credit, or finance could become a drain on the real economy (physical commodity production) in Theories of Surplus Value and Vol. 3 of Capital.


[1] Morath, E. “Seven Years Later, Recovery Remains the Weakest of the Post-World War II Era”. The Wall Street Journal. 29 July 2016. Web. Accessed 4 August 2016. http://blogs.wsj.com/economics/2016/07/29/seven-years-later-recovery-remains-the-weakest-of-the-post-world-war-ii-era/

[2] Ibid.

[3] Scott, R.E. “Worst recovery in postwar era largely explained by cuts in government spending”. Economic Policy Institute. 2 August 2016. Web. Accessed 4 August 2016. http://www.epi.org/blog/worst-recovery-in-post-war-era-largely-explained-by-cuts-in-government-spending/

[4] Ibid.

[5] Ibid.