Why has the economic recovery since 2009 been so weak? President Obama and his supporters claim that the weak recovery is due to the recession’s severity and the fact that it was accompanied by a major financial crisis.
However, Harvard economist Robert Barro, writing in the Wall Street Journal, finds these excuses unpersuasive. Barro’s view is based on a study he and Tao Jin performed of economic downturns in the U.S. and elsewhere since 1870. They found that the growth rate during a recovery relates positively to the magnitude of decline during the downturn. If anything, then, the recent recovery should have been more robust than normal, not less, given the severity of the preceding recession.
Examining macroeconomic disasters in 42 countries, featuring 185 contractions in GDP per capita of 10% or more, Barro and Jin found that on average, during a recovery an economy recoups about half the GDP lost during the downturn. It follows that larger the contraction in GDP, the larger the increase during a recovery.
The 2008 recession involved a financial crisis. Does this help explain the weak recovery? Not according to Barro. He found that many of the recessions that were followed by vigorous recoveries featured financial crises.
Barro attributes the weakness of the recovery to lack of growth in labor productivity. He ties that lack of growth to Obama administration policies:
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.
What policies promote productivity growth? Barro lists the following:
[S]trong rule of law and property rights, free trade, rolling back inefficient regulations and other constraints on market activity, public infrastructure such as highways and airports, strong institutions for education and health, fiscal discipline (including a moderate ratio of public debt to GDP), efficient taxation, and sound monetary policy as reflected in low and stable inflation.
The Obama administration provided little of this, which probably explains why the economic recovery was so weak.