Over at the Washington Post, Neil Irwin explains that just how disappointing this recovery has been:
This economic recovery has been a big disappointment relative to what the United States has usually experienced after a recession. Growth has been 9 percent below what was seen in past recoveries on average in its first three years. The CBO report tries to disentangle where that underperformance is coming from and its answer is deeply unsettling: The U.S. economy just isn’t as good at growing as it used to be.
The new CBO report claims that two-thirds of the underperformance of the economy over the past three years compared to a typical recovery is due to a slower rate of growth in potential GDP. Only one-third, in this analysis, is due to factors related to this recession.
The Congressional Budget Office’s chart, on the cover of a recent report, makes this clear:
So what the CBO study is really saying is that there remains a gigantic cyclical gap in the U.S. economy, and this recovery has been awfully slow. And it has also occurred at a time when our potential economic growth isn’t rising as fast as it used to, mainly for reasons unconnected to the unique impact of the financial crisis. And while both those trends are big, the second one is bigger than the first.
This conclusion includes two pieces of bad news: The economy has not recovered its lost output from the recession, and the economy seems to have settled in a pattern of lower growth (certainly lower than this country has experienced in the past). How long will that last? Unfortunately, I am worried that this slow growth — which is the product of the joint legacy of big-government policies of the Bush and Obama administrations – is here to stay until we finally reduce the size of government. For evidence that when government spending grows, the economy shrinks, see here, here, and here.
The other bad news, I guess, is that without real reforms of the programs that are the drivers of our long-term debt, things will get worse before they get better. Sadly, it looks like the kind of policy prescriptions that Congress and the president seem likely to adopt (more spending and more taxes) are exactly the kind of policies that will make things worse in the short and long term. That’s unfortunate considering that we know what successful fiscal adjustments look like and what types of policies should be implemented to get there.