This article appears in the April 21, 2014 issue of National Review.
At the beginning of the Great Recession, economists Carmen Reinhart and Kenneth Rogoff warned that the recovery might be a long one because the recession had been preceded by a financial crisis. Typically, recovery from financial crises takes at least a decade. While Keynesian ideologues predicted a normal V-shaped recovery because of the Obama stimulus, those with a sense of history warned that long-run policies such as permanent tax cuts were the only medicine capable of delivering sustained growth.
More than six years after the start of the U.S. financial crisis, with GDP growth still slow and steady and the unemployment rate only recently falling below 7 percent, the early predictions based on the Reinhart and Rogoff data look spot-on. Unfortunately for the U.S., the economy has followed a path remarkably close to that of other countries recovering from a financial crisis. If anything, the U.S. experience is slightly worse than average.
The accompanying charts use data on 15 separate financial crises from a follow-on paper by Carmen Reinhart and Vincent Reinhart to show where the U.S. stands. The top chart shows how real per capita GDP has changed in the U.S. before and after the financial crisis, compared with the median performance of countries similarly stricken. (On the vertical axis, real GDP in the year of the financial crisis is indexed to 1, to make a visual comparison easier. On the horizontal axis, the crisis year is labeled “T,” and time before or after the crisis is measured in years.) The bottom chart compares the unemployment experience of the U.S. with that of the median crisis country.
Overall, U.S. performance has been a good bit worse than the median experience of other countries. Real per capita GDP in the U.S. is about 6 percent below where it would have been if we simply had followed the median path. The unemployment rate is slightly below the median of other affected countries, but most of that difference is likely due to a decrease in labor-force participation, a pattern that has been more dramatic in the U.S. than in other countries and is in part attributable to the great increase in the percentage of the work force claiming disability insurance.\
The massive efforts at stimulus, then, have had little visible impact on the relative performance of the U.S. economy—contrary to a recent White House report on the impact of the stimulus that made the following claim: “Thanks in significant part to the actions of President Obama, the economic picture today is much brighter.”