Everyone has a vague understanding of the fact that the financial crisis and the Great Recession exacted a hellish price in terms of economic disruption, but nobody to this point has made the effort, or perhaps felt the need, to specifically measure the damage.
That changes with a new paper by economist Robert E. Hall, a senior fellow at Stanford University’s Hoover Institution. His working paper, Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis, argues that U.S. economic output in 2013 was 13 percent below what the pre-crisis trend had predicted.
“The years since 2007 have been a macroeconomic disaster for the United States of an unprecedented magnitude since the Great Depression,” Hall writes. Sadly, he finds, there is little to suggest that a sudden surge in output will help the economy recover the ground it lost. A possible scenario is a gradual return to a pre-crisis growth rate that will leave the U.S. permanently below the level of output that pre-crisis trends had suggested.
The largest factor in the economic slowdown has been a shortfall in business capital, to which Hall attributes 3.9 percent of the country’s lost output. He argues that business investment will eventually return to its pre-crisis path – but not soon.
“Because the capital stock is…incapable of making jumps, it would be impossible for a boost to product demand to restore the crisis-induced shortfall in capital,” he writes. “As time passes and the adverse eﬀects of the crisis on product demand and discount rates dissipate, capital will return to its pre-crisis growth path.”
The other main factors Hall identifies are a decline in total factor productivity, continued slack in the labor market, and a declining labor force participation rate.
Of all four factors, Hall seems most pessimistic about the recovery of pre-crisis rates of labor force participation. He attributes 2.4 percent of the lost output to declines in labor force participation; and while noting that about 1 percent of that was demographic, he warns that the remainder may not be easily reversible, in part due to how benefits programs, such as food stamps, are dramatically cut back when recipients begin earning even a small amount of money.
“[A]n important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings and so discourage labor-force participation among beneficiaries,” Hall writes.
He concludes that the incentive problem is difficult to address, and “may impede output and employment growth for some years into the future.”
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