NEW REPORT: Congress Must Go Big on Upcoming Investments; Economists Warn of Costly Long-term Consequences for America’s Future if Congress Fails to Act

Today, Groundwork Collaborative released a new report from Dr. Adam Hersh, Director of Washington Global Advisors, LLC and a Research Associate at the Political Economy Research Institute, University of Massachusetts Amherst, and Dr. Mark Paul, Assistant Professor of Economics and Environmental Studies at New College of Florida, highlighting the costs of underspending in the wake of previous recessions and the need for massive investments from Congress to bring the economy back to full employment and broad-based recovery and growth. 

The new report argues that we can’t afford to repeat the mistakes of the Great Recession by cutting off government investments too early or aiming too low. The authors find that running the economy “too cold” after the Great Recession created at least an $8.2 trillion gap over the past decade that left millions of potential workers out of the labor force, prevented wage growth, and deterred investments that would boost long-run efficiency, productivity and prosperity. In short, the costs of inaction outweigh the risks of borrowing to take action — by trillions of dollars. 

The report demonstrates how by running the economy “hot” with up to $10 trillion in additional investments, Congress can ensure recovery achieves broad-based job creation and boosts productivity to raise America’s long-term economic prospects. It also highlights how the Congressional Budget Office (CBO) consistently underestimated “potential output” and overestimated future interest rates, which exaggerated budgetary costs and led policymakers to hit the brakes on spending far too early in past recoveries. 

Key excerpts from the paper (read the full paper here)

• “The $2 trillion American Jobs Plan (AJP) takes a step in the right direction...with investments in infrastructure, economy-wide decarbonization and environmental justice, and caregiving that will yield a more productive, equitable, and sustainable economy. But with needs estimated at roughly five times as much as the AJP proposes, there is still a long road to walk.”
   
• “...Congress has ample fiscal space to responsibly pursue such an agenda... a failure to use this space actively endangers America’s economic future, making everything more difficult: recovering from the pandemic; redressing economic, gender and racial inequities; meeting the climate challenge; competing on technologies of the future, and managing the country’s long-term fiscal position.”
   
• “Simply returning the economy to its pre-pandemic status quo is not an option. Congress should now run the economy ‘hot,’ investing big to achieve true full employment, redress chronic racial and gender inequalities, and avert a looming climate catastrophe. Such investments will make the economy fairer, more sustainable, and more efficient while ensuring the country has the resources to keep building towards greater and more broadly shared prosperity.”

• Past policy decisions pulled the rug from underneath economic expansions too soon by providing too little fiscal support and tightening interest rates too early. Far from an overheating economy, America has run its economy “too cold,” leaving millions of potential workers out of the labor force, forestalling broad wage growth, and deterring investments that would boost long-run efficiency, productivity and prosperity. 
   
• Relative to the pre-Great Recession trend — which was still below full employment — inadequate fiscal policy cost the economy at least $8.2 trillion in GDP combined from 2010 to 2019. This amounts to $32,317 in lost income per adult — roughly equivalent to one year’s income for the median household with two adults. These costs have been borne disproportionately by lower-income workers and communities of color.
   
• Past policy choices have been guided by the Congressional Budget Office’s (CBO) mistaken projections that consistently underestimated “potential output” and an overestimated future interest rates. These mistaken projections exaggerated budgetary costs and led policymakers to hit the brakes on spending far too early in past recoveries, entrenching long standing racial and gender inequities, and deterring investments that would raise efficiency and living standards over the long term. 
   
• Built into the CBO model are deeply problematic and racialized assumptions about how low the unemployment rate can go without inflation, known as the “natural rate.” CBO defines a “natural rate” for Black workers that is more than double the rate of white workers, and a “natural rate” for Latinos more than one-third higher. 
   
• Going too small on spending in past recoveries did more than make the economy more unequal — it created a self-reinforcing cycle of economic underperformance that permanently reduced America’s potential for growth and prosperity.