Debating the Great Recession

When I took economics (before the glaciers descended and dinosaurs ruled the earth), the Great Depression of the 1930s was still being debated and to a lesser extent it still is. We have probably just barely begun debating the Great Recession. There are several diverse explanations for why U. S. economic growth has been so slow in its aftermath:

1. The fiscal stimulus wasn’t large enough.
2. It wasn’t caused by a shortfall in aggregate demand but by too large a debt overhang, i.e. it was a “balance sheet recession” (which means that fiscal stimulus of whatever size would have been ineffective).
3. We have a mature hybrid economy now that doesn’t respond to the old strategies.
4. We are in a global economy now and moves by the U. S. are matched by counter-moves in other countries. Fiscal stimulus in the U. S. may result in economic growth in China rather than the U. S. Chinese inflation may result in U. S. deflation.

Note that the first two explanations are mutually exclusive.

The most recent salvo in the debate over the aftermath of the Great Recession comes from Robert Barro in an op-ed in the Wall Street Journal:

Arguing that the recovery has been weak because the downturn was severe or coincided with a major financial crisis conflicts with the evidence, which shows that a larger decline predicts a stronger recovery. Moreover, many of the biggest downturns featured financial crises. For example, the U.S. per capita GDP growth rate from 1933-40 was 6.5% per year, the highest of any peacetime interval of several years, despite the 1937 recession. This strong recovery followed the cumulative decline in the level of per capita GDP by around 29% from 1929-33 during the Great Depression.

Given the lack of recovery in GDP, a surprising aspect of the post-2009 period is the strong employment growth. The growth rate of total nonfarm payrolls averaged 1.7% a year from February 2010 to July 2016, despite the drop in the labor-force participation rate. The post-2009 period is not a jobless recovery; it is a job-filled non-recovery. Similarly, the drop in the unemployment rate—from 10% in October 2009 to 4.9% in July 2016—has been impressive, though overstated because of the decrease in labor-force participation.

What accounts for the strong recovery in the labor market combined with the non-recovery in GDP? Mainly weak growth of labor productivity. The growth rate of GDP per worker from 2010-15 was 0.5% per year, compared with 1.5% from 1949 to 2009. The recent productivity slowdown is clear since 2011 but may have started as early as 2004.

Probably the most controversial claim in Dr. Barro’s op-ed is this:

The main U.S. policy used to counter the Great Recession was increased government transfer payments. Federal social benefits to persons as a ratio to GDP went from 8.7% in 2007 to 11.7% in 2010, then fell to 10.9% in 2015. The main increases applied to Medicaid, Medicare, Social Security (including disability) and food stamps, whereas unemployment insurance first rose then fell. Unfortunately, increased transfer payments do not promote productivity growth.

and he doesn’t much care for either the prescriptions of Hillary Clinton or Donald Trump.

My own view is that we’re in a global economy now, that debt overhang probably played some role but not the only role, that we import too much of what we consume, and that the fiscal stimulus of 2009 was probably too small, definitely too slow, and almost entirely politically motivated. The employment figures are a phantasm, created by obsolete adjustment factors.