Remarks at the 2016 Hubert Humphrey Alumni Association Annual Lecture
It is a pleasure to meet so many Hubert Humphrey Fellow alumni and their guests.
In particular I want to acknowledge Chairman Chief Olabintan Famutime, Ayodele Teriba, and Henrietta Onwuegbuzie.
When I was first asked to give this talk I wondered which American recessionary economy you wanted me to discuss …
Because, using the National Bureau of Economic Research’s definition of a recession, which is:
A significant decline in economic activity spread across the economy, lasting more than 6 months, normally visible in real gross domestic product, including, employment, industrial production, wholesale-retail sales”
…there have been as many as 47 recessions in the United States since 1790.
This morning I will give you a brief overview of how the United States government and the American people have dealt with recessions since we began keeping track of business cycles in 1790.
I will conclude with a summary of what one well-known U.S. think tank — the Brookings Institute – and the Democratic and Republican parties consider to be the key lessons we have learned from the 2007-2009 “Great Recession” – the most severe recession since the great depression.
Cycles in the country’s agriculture, consumption, and business investment, and the health of the banking industry have contributed to American recessions.
And, as the U.S. economy became increasingly intertwined with economies throughout the world, the downturns in the U.S. economy have been felt around the globe.
Each time we have fought our way out of a recession the United States government and the American people have learned new lessons about the best way to get our economy on the path to recovery.
One of the best lessons we have learned is that recessions offer governments an opportunity to make the case to the people for taking action on overdue economic reforms. Some of our most important long-term advances in addressing economic challenges have come in the form of legislative and policy changes.
The U.S. economy has changed beyond recognition over two centuries, but some features endure: a vigorously competitive marketplace, spurts of invention and innovation, political swings between more government regulation and less, between higher protective tariffs or other barriers and freer trade.
When George Washington took office as the first president of the United States in 1789, eight out of 10 Americans lived on farms, mostly just feeding themselves, and the largest U.S. city, New York had only 22,000 residents.
At the end of the American Civil War, 76 years later, the country was split between an industrialized North and the South which had an economy based on agriculture. By the 1880s U.S. manufacturing and commercial output surpassed farm output in value.
During the 19th century there were a number of life altering inventions and innovations, including the telegraph, the telephone, the light bulb, the phonograph, and systems for distributing electric power to homes and businesses. By the early 20th century, electric power surged throughout the U.S. economy, powering factories, promoting automated manufacturing, lighting offices and homes, illuminating department stores and movies theaters, lifting elevators in skyscrapers and powering city streetcars and subways.
On the heels of what appeared from the outside to be a glorious time for the U.S. economy and the American people – and for many it was – debt-ridden farmers in the South and West were fighting tight credit and falling commodity prices. Workers and businesses faced severe economic recessions in the 1870s and 1890s.
The American worker fought back. A short-lived Populist political party, focusing anger at wealthy financiers and industrialists, demanded lower interest rates on loans and inflationary monetary policy to let debtors repay their debts with less valuable dollars. Workers also backed the Progressive party which forced the government to enforce antitrust laws to break up concentrations of economic power in railroads, oil, beef, and tobacco.
For the first time incomes taxes were collected from corporations and wealthy individuals. And in 1913 the Federal Reserve was created, the first U.S. central bank chartered since 1830.
Coming out of World War I the U.S. and global economy flourished during the 1920s. However, the decade ended with the crash of the stock market and the beginning of the Great Depression.
Prices collapsed, impoverishing farms, businesses, and families About 40 percent of U.S. banks failed and many depositors lost their savings.
This time the Federal Government took the lead in fighting back. The United States imposed punitive tariffs on imports, and its trading partners retaliated in kind spreading the economic contraction around the world. The U.S. unemployment rate approached 25 percent.
President Franklin D. Roosevelt was elected in 1932. The president launched programs aimed at halting the banking crisis, creating government jobs for the unemployed and raising farm prices by reducing output.
The United States did not have term limits at the time, and America elected Roosevelt four times to serve as President. A number of the initiatives started at this time have continued to the present: a minimum wage law, the Social Security retirement pension systems, regulations on banks and the stock market, and insurance on consumer bank deposits.
The United States achieved a strong, economic recovery during World War II.
A lesson that American policymakers learned during the decade of trying to restart the U.S. economy was that one key to long-term prosperity was a world in which the economies of other nations prospered and grew. The United States and other industrial nations agreed to a global monetary system that resulted in the creation in 1944 of the International Monetary Fund and World Bank.
The United States also played a major role in negotiating the General Agreement on Tariffs and Trade which was signed by 23 nations in Geneva in 1947 and in the successor to the GATT, The World Trade Organization, which was established in 1995 following an agreement signed by 123 nations at Marrakesh in 1994.
All of these efforts were motivated by the hope that promoting rules-based global trade would bring greater economic stability and peace.
After World War II, international trade and finance became ever more crucial to the U.S. economy. By the 1950s the value of farm and factory output was surpassed by the output of services such as wholesale and retail trade, finance, real estate, health, law, and education.
From World War II until 2007, Americans experienced periods of unprecedented economic expansion and prosperity, propelled in part by the 76 million Americans born in the 1946–1964 “baby boom.” The recessions that did occur in the postwar years until 2000 were relatively short and mild by historical standards.
An inflationary spiral began during the Johnson administration and got worse through the 1970s. During that time President Richard Nixon had briefly imposed government wage and price controls in a failed attempt to arrest inflation. Oil shocks to the U.S. economy following the 1973 Arab-Israeli War and 1979 Islamic revolution in Iran contributed to stagnant economic performance. The inflationary spiral did not end until the U.S. Federal Reserve raised interest rates sharply in 1981–1982, causing a recession.
Tax cuts and business deregulation pursued by President Ronald Reagan in the 1980s marked resumption of robust economic expansion and a long rise in stock prices. Those policies also marked, however, the start of a long climb in federal government debt. Economists have also noted since this period saw a widening income gap between the wealthiest Americans and the rest of the populace.
California-based entrepreneurs introduced transformative computer technologies. These sparked new domestic and international consumer markets, and invigorated the U.S. economy. The raw material for semiconductors gave the California center of computing innovation the name Silicon Valley.
The 1990s (not unlike the 1920s) saw strong economic expansion, increased prosperity and stock market speculation. When the resulting “dot com” bubble burst in 2000, the stock market crashed and the economy went through a short recession.
Following the dot-com recession, another speculative bubble arose, this one fueled by sustained low interest rates, which distorted the U.S. real estate and home mortgage market. The overbuilt housing market crashed in 2007, followed in 2008 by a financial crisis that spread to much of the world. For the first time since the Great Depression, U.S. unemployment soared to 10 percent in 2009, slipping only to 8.8 percent by March 2011.
The United States and other developed countries took extraordinary measures to combat the crisis. Central banks lowered interest rates close to zero, and governments borrowed more money to support economic stimulus projects and to prop up ailing banks and major industries.
The theory was to spend as necessary to forestall another Great Depression and to repay creditors once economic growth had been restored. The recession officially dated from December 2007 to June 2009, but high unemployment persisted in the slow economic recovery.
Discussing the effects of the Great Recession on countries other than the United States in detail would take me beyond the scope of my talk – and we would all be here for a very long time, so to summarize:
The U.S. recession of 2007 to 2009 had a profound effect on the global economy. Few countries remained unscathed.
In the final months of 2008, the U.S. economy was losing nearly 800,000 jobs per month and shrinking at an annual rate of over 8 percent, and many indicators—from household wealth to the stock market – were falling faster than they were during the Great Depression. Today, thanks to the resilience of the American people and the decisive actions of policymakers, the U.S. economy has experienced an historic turnaround.
Not only has our economy achieved solid growth in the near term, but it has built a stronger foundation for the long term.
Businesses have added 15.5 million jobs since early 2010. Our economy has seen the longest streak of total job growth on record.
Since its peak during the recession, the unemployment rate has been cut by more than half and now stands at 4.9 percent, reaching that level far sooner than expected.
Nevertheless, more work remains to strengthen growth and ensure that it benefits working families, especially reversing decades-long trends of rising inequality and low middle-class wage growth.
Turning to the question of what have we learned during this most recent recession I note that throughout U.S. history there have been two sets of tools to foster economic recovery: monetary policy and fiscal policy. The Federal Reserve is the key institution in the United States dealing with monetary policy. Fiscal policy includes various forms of government spending and tax cuts enacted by Congress.
The great recession was unprecedented in the postwar period for its severity and duration. Facing an economic crisis in 2009 there was bipartisan support for the American Recovery and Reinvestment Act (ARRA) which used by fiscal and monetary measures to stimulate the economy. The act authorized spending on infrastructure, health care, and education; expanding automatic stabilizers; and making various tax cuts.
The Brookings Institutes asserts that fiscal stimulus tempered the length and the depth of the Great Recession.
Republican and Democratic economic experts disagree on whether lowering the federal interest rate had an effect on the unemployment rate.
While there is general agreement that the Federal Reserve Bank did the right thing by dropping the federal funds rate there are doubts about whether this made any difference. The Brookings Institutes maintains that federal spending programs and tax cuts as adopted under the American Recovery and Reinvestment Act provided highly effective stimulus during the recession.
I must point out that this is a point of contention between the Republican and Democratic parties. Generally speaking Democrats advocated for spending programs and the Republican House pushed for tax cuts. The spending programs include unemployment insurance and health programs.
As some of you may have noticed during our most recent elections the effectiveness of these measures was still being hotly debated by the two parties.
Both sides of the aisle agree with the Brookings Institute, however, that automatic stabilizers provided substantial, well-timed stimulus. The three primary automatic stabilizers were unemployment insurance, Medicaid benefits and food stamps.
What can Nigeria learn from the United States’ history and experience dealing with recessions?
Based on the American experience of dealing with recessionary economies it is clear there is no simple answer. There is not a one size fits all solution.
Different times, different circumstances require a unique set of fiscal and monetary policies.
I feel confident saying that the solution is both inside and outside of Nigeria. I am also confident in saying that the policies do make a difference. They can make things worse, they can make things better.
The lesson learned in the wake of the Great Depression is that economies stand to gain more by being open than by being isolationist.
The United States continues to be the number one destination for foreign direct investment for several reasons, including: the confidence foreign investors have that they will be treated fairly, that they can repatriate profits, that the rule of law is supreme, and that it is relatively easy to do business.
In June of this year on the release of a report on FDI in the United States, Secretary of Commerce Penny Pritzker, who visited Lagos and Abuja in January, said, “Foreign direct investment in the United States reached a record $348 billion in 2015, contributing to our economic growth and demonstrating our continued global competitiveness.
At the Department of Commerce, we work every day to strengthen America’s best assets such as our highly productive workforce and our commitment to innovation to ensure that the United States remains the most attractive destination for investment.”
As the most populous country on the continent and as the largest economy in Africa, Nigeria clearly stands to gain from increasing its attractiveness to foreign investors. As in the case for the U.S. economy, FDI offers much to contribute to Nigeria’s ability to grow its economy and increase its global competitiveness.
I hope that Nigeria will use the current recession as an opportunity to adopt and implement economic reforms to address challenges that existed before the current recession began but that will still need to be met and overcome after the recession ends, which we all know will happen, in order to set this country on course for long-term sustainable development and help it to bring greater prosperity to all the people of Nigeria.
As a partner and friend, the United States remains committed to helping Nigeria realize its economic potential.
Thank you for allowing me to share the American experience of dealing with recessionary economies with you.
I am sorry that I will not be able to stay and hear my esteemed colleagues speak.
We unexpectedly had high-level visitors to whom I must attend.
Thank you again for coming and I look forward to working with you in the future.