I may have mentioned that for the size govt we have we are grossly over taxed?


Real GDP is growing, but weakly compared with the postwar average recovery.

The recovery from the 1980 recession was even weaker at this stage, but that reflected a double-dip recession in 1981.

The economy would have to grow at a 7.6 percent annualized rate in order to catch up with the average postwar recovery by the end of 2012.

The consensus forecast for 2012 growth as reported by Bloomberg is 2.1 percent, up just slightly from a forecast of 2.0 percent as of last October.


Soft home prices have been central to the weakness of the recovery.

The continued weakness of nominal home prices is a postwar anomaly.


In every previous postwar recovery, the stock of household debt has risen as the recovery has begun.

In the current recovery, the collapse in home prices has severely damaged household balance sheets. As a result, consumers have avoided taking on new debt.

The result is weak consumer demand and, hence, a slow recovery.


The slow recovery is obvious in the labor market, where job growth remains painfully sluggish compared to the average recovery.

The recent uptick at the end of the Current Recovery linev(red) is the result of encouraging payroll data announced on January 6th 2012.


Because of the depth of the recent recession, one might expect stronger-than-average improvement in industrial production.

Despite the predicted snapback, the increase in industrial production during this recovery is actually slightly slower than in the average postwar case.


Capacity in manufacturing, mining, and electric and gas utilities usually grows steadily from the start of a recovery.

However, during the current recovery, investment has been so low that capacity is actually declining. Plants and machinery are depreciating faster than they are being installed.


The growth in world trade exceeds even the best postwar experiences.

However, this reflects the depth of the fall during the recession.


The federal deficit since the start of the recovery has been much higher than in previous postwar cases.

Although the deficit has shrunk slightly, its level creates significant challenges for policymakers and the economy.


The traditional American enthusiasm for the road has been dulled by a combination of weak recovery and high fuel prices.

When compared to other postwar recessions, total vehicle miles traveled in this current recovery has not only lagged the average, but has registered no growth whatever.

44 Responses

  1. Why hasn’t the pronounced deficit been enough to make the recovery stronger? Is there some other measure that would correlate to why the recovery is so weak?

    The high deficit yet weak recovery seems to be counterpoint to MMT?

    1. @Paul Palmer,

      You can’t look at deficits in isolation to the sectoral balances. The desire of the non-government sector to save in Japan is very strong indeed and the government must either accommodate those savings via the deficit – or confiscate them.

    2. @Paul Palmer,
      The growth of the deficit only strengthens the economy when that money is used to purchase real goods and services as it is now, the deficit spending is being used for things like quantitative easing and only is basically sitting as reserves. Only through those banks actually distributing those dollars via loans or through the government directly buying goods and services can you actually expect GDP to rise. Reserves or Treasuries sitting in banks does no one any good.

      1. @Abram Larson, I’m no MMT authority but I think there are two basic flaws in this statement:

        1. Deficit spending is not being used for QE. QE is a monetary operation of the Fed. It is essentially an asset swap resulting in no net money creation. The Fed simply credits a party’s checking account while debiting their savings account for the same amount. It is definitely not part of the ‘deficit’. Deficit spending is a fiscal operation and results in net creation of financial assets.

        2. Loans and the lack thereof have little to do with it. Loans have to be paid back, whereas deficit spending does not. People won’t and can’t take on more debt right now because the value of their assets, i.e. houses, collapsed in 2008. If the deficit is failing to expand the economy it’s because, as Neil Wilson points out, the desire to save is currently so high that there is little to none left over for spending.

        People became enormously over-leveraged in the past decade or so based on the housing bubble. Now that that has collapsed, they see their net worth has become negative and they are seeking to de-leverage. Until the deficit is large enough both to accommodate this increased desire to save and to give people room to spend, the spending will not occur and the economy will not grow. Borrowing on the scale we saw in the past decade will not occur until either the de-leveraging process is complete (which will require a lot of deficit spending to accomplish) or another asset bubble is created that gives households collateral to borrow against. (I don’t see that one happening any time soon).

        And as John O’Connell points out below, the continuing trade deficit means a lot of that government deficit spending is being credited to the accounts of foreigners and not being spent domestically. So this is why the economy can remain in the doldrums in spite of their being ongoing government deficits, i.e. the deficits are not large enough.

    3. @Paul Palmer,

      Niel Wilson is right, you have to look at the sectoral balances. The deleveraging this time is much higher than usual, and the growth in trade tells of a large and growing US trade deficit (Re postwar averages, the US had trade surpluses until about 1970, which means lesser deficits were required to recover from the recessions in those days.) The combination of unusually high trade deficit and unusually high private sector savings requires the unusually high deficit just to tread water.

    4. It seems to me an untold story of the modern economy is the rapid growth of international trade since about 1990. That change is far more significant than any other measure, such as tax rates, debt levels, etc. Without looking it up I believe imports/GDP has grown from something like 3% to 18% in that timeframe.

      If our trading partners wish to net save in dollars, to the tune of about 3% of GDP, then we must run that amount in deficit just to “break even” on international trade, let alone private US citizens. The advantage to the US is a higher standard of living than otherwise, even though the economists say GDP falls when imports exceed exports.

      It seems to me more than marginal tax rates or debt levels or interest rates or anything being debated by the politicians right now, we have not adjusted to the new reality that international trade is on a path to account for a fifth to a quarter of our economy.

  2. The reason the economy crashed was private debt was out of control. The private sector borrowed $4.2 trillion in 2007.
    that was 30% of GDP. The total credit market debt was 370% of GDP a when the economy collapsed. Had growth in private sector debt continued on the same trajectory (11% per year growth), total credit market debt would now be 500% of GDP. It is pretty clear that private debt was out of control and unsustainable and thus it wasn’t able to be sustained.


    Current credit contraction in the private sector stands at about -10% of GDP per year. Add that to the 10% the Federal govt has borrowed every year and Total Credit market debt has stood at about $52 trillion for 3 years.


    There is a reasonable argument to be made that the US has been in a depression since 1998 and it is only due to the
    private sector borrowing in excess of 25% of national income every year that mask the depression from view in the decade preceding the crash.

    The federal deficit is now the only thing keeping the economy out of this depression. The deficit is not going to go away. Any attempt by Congress to lower the deficit will result in diminished national income and lower Federal revenue. The deficit will continue to grow at its current rate or faster no matter what fiscal policy is pursued.

    1. @jim,

      This was my hunch on the Sectoral Balance. If the Federal Government “tries” to reduce its deficits/debt, the private sector will lower consumption and therefore earnings/revenue of the economy will fall, lowering tax receipts, pushing the debt right back to the Federal Government – only then, it will be a larger % of GDP because of a smaller economy.

  3. In 2008, James Galbraith wrote:

    “Despite our faults, we have a well-designed economic system, the enduring fruit of the New Deal and Great Society. Thus Uncle Sam can borrow, at very low cost, whatever he needs—a terrific advantage over the competition. But in the long run, the world will support us only if we give something back.”

    I’m guessing he is only a recent convert to MMT, or perhaps was just accepting the reality that our policymakers do not understand MMT?

    1. @Tyler,

      Not inconsistent with MMT. Floating exchange rates are an integral part of MMT, and the statement could be interpreted to mean that the world will not allow the US to import ever-larger quantities of goods without adjusting the exchange rate so as to maintain some level of US exports (the “giving back” part).

      Or, he may have been talking about foreign aid, and being the world’s policeman. The context may make it clearer.

      1. @WARREN MOSLER,

        Better technically, and more on topic with economics, less on politics. The contrast in the tone of the two articles is even more striking than the complete reversal of economic rationale, even though he advocates much of the same policy. Either it’s true that he “discovered” MMT in the interim, or the first article was very much tailored to an audience.

  4. “The continued weakness of nominal home prices is a postwar anomaly.”

    The unbelievable increase of nominal home prices leading up to the crash is the real anomaly. (“Anomaly” sounds so tame. What’s a more cataclysmic word for it?)

  5. Will “However, during the current recovery, investment has been so low that capacity is actually declining. Plants and machinery are depreciating faster than they are being installed.” be inflationary?

    All else equal, if capacity falls, inflation risk rises, right?

    1. @Crake,

      Then if inflation happens because of this, the inflation crowd can easily entertain a “we told you sold” even though their analysis is completely wrong, adding fuel for further incorrect policy.

  6. On ” Plants and machinery are depreciating faster than they are being installed.”, is this true mechanical deprecation or simply accounting depreciation? How is it measured?

  7. If warren is correct about taxes, then lower taxes will result in even higher deficits. The economy could still want to deleverage from the previous housing bubble and high private debt levels. I think the economy will eventuallly take off since corps have trillions on their balance sheets. Now how does one revive those animal spirits, i heard about?

    1. @Jonf,
      When people have more money in their pockets and start spreading it around instead of paying off their debts, the animal spirits mysteriously seem to awaken.

  8. But isn’t house price weakness sort of a good thing? The houses weren’t really worth what people paid for them and a ‘recovery’ in house prices just means future home buyers would go further into debt to purchase a home, which would just recreate the current problem. Principal markdowns to current values would seem a better solution than re-inflating the bubble.

    As you said, people have avoided taking on new debt. But isn’t this a good thing? Purchasing power is income plus change in debt. Since income equals spending, it seems to me the optimal solution would be to increase incomes, and to do that, there needs to be more NFA for currency users. Thus more fiscal policy. I think you’re proposal of a per capita disbursement of money to the states would be the most politically palatable at the moment.

    More or less correct???


        Point taken, but isn’t the real problem the deleveraging? If the rate of private debt being paid back is faster than the rate of new debt being created, money supply shrinks, incomes fall and the economy contracts. Can’t this be offset by govt adding NFA, thus holding the money supply constant, allowing deleveraging to happen without paradox of thrift effects? or am I just focusing too much on money supply.

  9. G’day Warren
    It seems people always get bogged down on government deficits, as soon as you mention the word they seem to hang so much baggage on it (household budgets and the like).

    To clearly distinguish the case of the US, UK, Japan, Australia etc do you think we could use another term?
    Maybe something like Net Currency Issuance?

    When I talk about MMT with friends I refer to it as modern monetary technics – ‘this is technically what happens when…’ and then I get over them dismissing it as some weird ‘theory’.
    Labels and names are crucial.

    Many thanks for this site and all your work in explaining MMT!

    1. @Alex Summerfield,

      I like removing the “theory” word, but it’s still not catchy enough. “Monetarism” would be good, but it’s already taken. Maybe “Modern Monetarism”, “NeoMonetarism”, or “Monetarism 2.0” 🙂

      I don’t think Uncle Miltie would mind, he understood Functional Finance.

      Or Moslerianism.

      Or let the founders get together and vote, or draw straws for the naming rights. Keynes has his name on his theory, why not this one, too?

      1. @John O’Connell,

        Modern Monetary Mechanics. That’s really what the original intent is, I think. And the bulk of the technical writing. “How it works”, Warren said.

        Then we need a name for the policy that naturally flows from an understanding of the mechanics. Modern Monetary Policy? This is the part that lends itself more to an “ism”.

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