Policy Prescriptions for the Economy

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Chairman Conrad, Ranking Member Sessions, and Members of the Committee, thank you for inviting me to appear today to discuss the state of the economy and the optimal policy prescriptions for the future.

Why has economic growth been slow?

Unfortunately, according to the latest indicators, the U.S. economy continues to disappoint and performs more poorly than original forecasts that were made by the more optimistic economists, who also tended to be supporters of the idea that our economy needs a big Keynesian stimulus. The weakness sadly does not come as a surprise to those of us who were convinced at the outset of this crisis that we would experience a nonstandard recession and recovery. We have known for some time that financial crises inevitably create lengthy periods of slow economic growth that are more pronounced than the slowdowns caused by typical recessions.

 

Economists Carmen Reinhart and Kenneth Rogoff have studied the history of financial crises and found that they are inevitably followed by lengthy periods of slow economic growth. In Figure 1, which is taken from their study, it can be seen that the typical duration of the employment downturn after a financial crisis is 4.8 years. Another study by Ms. Reinhart and her husband Vincent Reinhart found that economic growth rates tend to be lower for as much as a decade after the crisis. I should add that their work, which is by far the most famous, is not the only that shows this connection, nor am I engaging in ex post theorizing. Back in early 2009 when I was testifying before the House Budget Committee, I made the same point drawing on work by economists at the IMF.

Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.

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