The Worst Economic Recovery in History


This gets to the heart of the policy arguments offered in the Citizen’s Survival Guide concerning long-term economic sustainability and stability. In addition to “growing” the economy, we will have to pay attention to the distributional consequences of market exchanges. Winner-take-all is not sustainable.

From today’s WSJ:

Since the second half of 2009, the U.S. economy has grown at a rate of 2.4%, a full percentage point below average long-term growth.

By EDWARD P. LAZEAR

How many times have we heard that this was the worst recession since the Great Depression? That may be true—although the double-dip recession of the early 1980s was about comparable. Less publicized is that our current recovery pales in comparison with most other recoveries, including the one following the Great Depression.

The Great Depression started with major economic contractions in 1930, ’31, ’32 and ’33. In the three following years, the economy rebounded strongly with growth rates of 11%, 9% and 13%, respectively.

The current recovery began in the second half of 2009, but economic growth has been weak. Growth in 2010 was 3% and in 2011 it was 1.7%. Who knows what 2012 will bring, but the current growth rate looks to be about 2%, according to the consensus of economists recently polled by Blue Chip Economic Indicators. Sadly, we have never really recovered from the recession. The economy has not even returned to its long-term growth rate and is certainly not making up for lost ground. No doubt, there are favorable economic numbers to be found, but overall we continue to struggle.

During the postwar period up to the current recession (1947-2007), the average annual growth rate for the U.S. was 3.4%. The last three decades have experienced somewhat slower growth than the earlier periods, but even in the period 1977-2007, the average growth rate was 3%. According to the National Bureau of Economic Research, the recovery began in the second half of 2009. Since that time, the economy has grown at 2.4%, below our long-term trend by either measure. At this point, the economy is 12% smaller than it would have been had we stayed on trend growth since 2007.

Worse, the gap is growing over time. Today, the economy is four percentage points further from the trend line than it was the first quarter of 2009 when this administration’s nearly $900 billion fiscal stimulus efforts began. If forecasts of around 2% growth turn out to be accurate, we will add to that gap this year.

Contrast this weak growth with the recovery that followed the other large recession of recent decades. In the early 1980s, the economy experienced a double-dip recession, with contractions in both 1980 and ’82. But growth rates in the subsequent two years averaged almost 6%. The high growth that persisted throughout the 1980s brought the economy quickly back to the trend line. Unlike the current period, from 1983 on, the economy was in rapid catch-up mode and eventually regained all that had been lost during the early ’80s.

Indeed, that was the expectation. As economist Victor Zarnowitz of the University of Chicago argued many years ago, the strength of the recovery is related to the depth of the recession. Big recessions are followed by robust recoveries, presumably because more idle resources are available to be tapped. Unfortunately, the current post-recession period has not followed the pattern.

The 2007-09 recession was induced by a financial crisis and some, most notably economists Carmen Reinhart and Kenneth Rogoff (authors of “This Time is Different: Eight Centuries of Financial Folly”), argue that financial crises pose more difficult recovery problems than do policy-induced recessions.

The early ’80s recession could be viewed as induced by the Federal Reserve’s tight monetary policy (i.e., raising interest rates), which was designed to rein in inflation. Growth returns more rapidly, they argue, when the policy hindering it changes (i.e., the Fed lowers interest rates) than when the economy is struggling after a severe credit crisis like the one we experienced after the 2008 collapse of Bear Stearns.

But some, Stanford economist John Taylor being their leading spokesman, argue that the current recession was caused by Fed policy as well—rates remained too low for too long in the lead up to the subprime mortgage fiasco. The Great Depression also began with a financial crisis but saw high growth rates following contractionary years, and the output lost in negative years was eventually regained through higher subsequent growth.

Are there other factors that may have contributed to the slow recovery that we are experiencing? It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment. Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments. Policies have focused on short-run changes and gimmicks—recall cash for clunkers and first-time home buyer credits—rather than on creating conditions that are favorable to investment that raise productivity and wages.

There are some positive developments. The labor market is improving, albeit slowly. Profits remain high and the stock market has enjoyed some recent success. We can hope that these indicate better times and higher growth ahead. But unless we move to a set of economic policies that are aimed at growing the economy rather than at promoting social agendas, this may be the first “recovery” in history that fails to see us return to long-term average growth.

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9 thoughts on “The Worst Economic Recovery in History

  1. We rebounded from the depression of the 30’s with heavy loans from Private Banking. It was a wise investment for them at the time because we were growing idustrially and they would have a certain control over our government and production of the dollar. It is the aftermath that this created that is keeping our economy down with inflation, perpetual debt and de-regulations. No one wants to give us money because we have NOTHING to offer anymore and the central bank (fed) see’s to much risk and we are already trillions of dollars in the hole to them. People seem to forget that the first depression was orchestrated, this depression simply shows the faults of getting into the pockets of the Central Bank and losing control of the production of money. We will never recover as long as our dollar is controled by non-governmental agencies.

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  2. Agree. And I would add that extends to “governmental agencies” as well. The difference between now and then on the monetary side was a gold-backed currency that was temporarily suspended by FDR. But intl payments were still backed by gold. Now we have a fiat, faith-based floating intl currency regime where central banks are only constrained by their ability to coordinate policy. So, we have an economy where monetary policy is the tail that wags the dog. This means capital markets and finance dominate everything. Robert Shiller has a new book out today that argues how finance needs to be reformed to be in the service to the real economy rather than the be-all end-all.

    I would say that far from having “nothing” to offer intl investors, we have a treasure trove of asset wealth in this country that foreigners would love to buy or take as collateral. But nobody wants to be tied to anything at a bubble price. We have a mini-asset bubble in collectables at the moment with prices justified by the greater fool theory.

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  3. Does anybody believe the numbers being thrown at us about growth, gdp, unemployment, etc? We are in the information age when a child can watch a digital movie on a hand held device while riding down the road in the back of a suv on a wireless device.
    For some reason we cannot get accurate numbers about anything. Check the news articles from all the major sources over the last 2 years and see how many times they have changed the numbers.
    20 years ago small business with less that 500 employees hired 85% of all new employees, that has dropped to 65%. There are 6 million of those companies . There are only 37k over 500 employees where are the new jobs going to come from?

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    • I understand. The key to information is this wonderful IT that we avail ourselves in blogs and longer-form ebooks that cost little to nothing to distribute. Information is a good counter-weight to concentrated political power, as most dictators of the world soon find out. But I’m afraid distracting the masses with “bread and circuses” is a gainful practice with a history as long as civilization itself. More information doesn’t mean more accurate and useful information. Truth has never been easy to discover.

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