The Congressional Budget Office released an infographic yesterday titled “What Accounts for the Slow Growth of the Economy After the Recession?” Indeed, that’s quite an important question. This race to get our economy, and our economic growth, back to pre-recession normalcy has been much more like a turtle than a hare. So what did the CBO find? Here’s the full shot (click on the image for the insane-size):
Basically there’s a nine percent gap between current Gross Domestic Product (GDP) growth and the “average cycle” in GDP growth following a recession. Obviously, this time is different (as the recession was quite different). To be clear the CBO claims that 2/3 of this gap is represented by slower potential GDP growth. Yet the remaining third is slower real GDP growth, of which major contributors to this difference include; federal government purchases (-3/4%), residential investment (-3/4%), and of course consumer spending (-3/4%). The one I’d like to highlight represents the single largest factor in depressing real economic growth in this recovery so far:
For all the contrarian talk about an oppressive federal presence in the business environment representing “shackles on the economy,” the single largest difference has in this recovery has actually been state and local government purchases — a full -1 percent, comparatively speaking. Business investment, on the other hand, is (inconveniently for some narratives) one of the bright spots in the story — up a quarter of a percent over historical trends and above it’s pre-recession peak:
Now this story of state and local government cutbacks is primarily a instance of depressed tax revenue, but it also includes federal grants; a funding mechanism sorely underutilized in the face of dire economic conditions. Which is to say, the single largest policy difference we could have made was keeping state and local expenditures at their post-recession averages. This would have affected state and local government employment as well, which you can see was/is a major drag on national employment:
We attempted something of the sorts in the ARRA (stimulus), but most of those funds ran dry this year (via CBPP):
Geez. If only there was previously proposed legislation that could have helped.
*Updated for clarity on the point of potential GDP growth representing two-thirds of the gap.
**Update: Read Neil Irwin for more on the potential output gap:
Potential GDP is the measure of what the economy is capable of producing if almost all of the people who want jobs are able to get one and almost all its machines and buildings were humming at their potential. While it has grown consistently through modern U.S. history (we can thank a growing population and steadily improving technology for that), it doesn’t always grow at the same rate. In periods when baby boomers were reaching their working years and women were entering the workforce in large numbers, the rate at which potential GDP rose was very high, over 4 percent at times, by the CBO’s reckoning.
In recent years, though, those trends have reversed. Baby boomers are starting to retire and the proportion of women who work has leveled off. The CBO’s estimate of potential GDP was rising at gradually steady rates for most of the 2000s even before the great recession hit, and has continued that downward trend since then.