Economic Policy Institute Research and Policy Director Josh Bivens outlined the intellectual and economic underpinning of the Congressional Progressive Caucus “People’s Budget,” in a new paper that acts as a full-throated defense of the ability to bring about a full economic recovery through fiscal stimulus. While political prospects of a significant fiscal stimulus are obviously small, the economics remain clear. A fiscal boost—even 7 years after recovery from the Great Recession began—would be the prudent and evidence-based policy choice.

Recent debates —particularly about analyses of Senator Bernie Sanders’ economic plans— may have left the impression that many economists—even those who had in the past been strongly supportive of fiscal stimulus—now think that the time for fiscal stimulus has passed. This is almost surely not true, Bivens argues, providing evidence that the economy would still benefit from stimulus and urging that Congress reengage fiscal policy to ensure a full recovery.

Bivens demonstrates that the economy still faces a measurable output gap, which requires stimulus to be closed sooner rather than later—the clearest evidence for this is that wage and price inflation remain subdued and have picked up only trivially in recent years.

A growing body of data and evidence indicates that each additional year the economy operates with slack caused by deficient demand risks also damaging long-run productive capacity. These risks mean that it would be far better for policymakers to overestimate the additional stimulus needed in the short run than to underestimate it. This is especially true given that “out years” in the People’s Budget see steady declines in the economy’s debt burden.

Bivens make the case that congressionally-led austerity, starting with the 2011 Budget Control Act, was a strong drag on growth—and that fiscal austerity during the current recovery in comparison to previous recoveries fully explains the failure to reach full employment.

“It’s too early to begin budgeting as if the economy is at full employment or will inevitably arrive there soon and stay there without policy help,” said Bivens. “Spending in the Progressive Caucus budget is worth in the short and long run. A fiscal boost, even this late in the recovery, that locks in a full recovery will halt any further deterioration of potential output caused by lagging demand and may even heal some of the previous damage. Going ambitious on fiscal stimulus is by far the less-risky path right now for policymakers.”

Key findings include:

· The U.S. economy has mounted a steady recovery from the Great Recession since its official end in mid-2009 but remains far enough from a full recovery to make a further fiscal boost a prudent policy choice.

· Conventional measures of the current “output gap”—a measure of how far from potential the economy is operating—are smaller but still non-trivial. But the shrinking output gap over the recovery has overwhelmingly been driven by deterioration in potential output rather than by fast growth in actual output.

· This recent rapid deterioration of potential output is a casualty of our failure to rapidly achieve a full economic recovery from the Great Recession, with investment rates and labor force participation rates hamstrung by continued slack in aggregate demand.

· Conventional measures of the output gap assume that unemployment cannot go significantly below today’s levels for extended periods without sparking wage and price inflation. The evidence doesn’t support this presumption, and more-aggressive unemployment targets should be adopted as long as wage and price inflation remain low.

· While it is possible that the slow recovery so damaged potential output that it cannot be repaired by a fiscal boost or that unemployment cannot go much below today’s levels, we should take this as given. It is far riskier to accept today’s depressed levels of productivity, wage growth, and employment rates as a “new normal” than it is to target faster growth in demand and lower unemployment

· Many have posited that “secular stagnation”—a chronic shortfall of aggregate demand—has become a key feature of American economic life. If this is true, it makes the case for a more expansionary fiscal stance going forward even stronger.

Regarding “secular stagnation” Bivens writes, “There is growing evidence that the demand shortfall that has made recovery from the Great Recession so stubbornly slow could be chronic going forward. This means that to keep the economy at full employment in the future, monetary and fiscal policies may need to be more expansionary than they have been during past episodes of full employment.”

He also notes that the CPC budget puts the debt-to-GDP ratio on a downward path once full employment is reached. 

“Barriers to Congress providing a needed boost to the economy in the short term and valuable public investments in the long term are clearly political, not economic,” said Bivens.