Tuesday, March 6, 2012

The Great Recession, Stimulus Bill, and the US economy

Brad Plumer points to these two excellent graphics (from the Economic Report of the US President) that maps the impact of fourteen cases of banking/financial crises induced economic recessions from across the world.

1. The average increase in unemployment rate from the peak of the business cycle is 7.7 percentage points for the 14 cases, whereas in the Great Recession during 2007-09, the US economy suffered a 5.1 percentage points rise unemployment rate.

2. The average cumulative decline in real GDP from the business cycle peak for the 14 cases has been 10.2 percentage points and the average duration of recessions has been 6.6 quarters, measured as the number of quarters between the peak and trough of real output. In the Great Recession, the US economy suffered a 5.1 percentage points cumulative drop in real output and it has taken 6 quarters to regain the lost output.

There have been many studies which have examined the impact of the American Recovery and Reinvestment Act 2009 in shortening the recession and keeping unemployment rates from getting higher. This summary of nine economic studies on the stimulus bill reveals that six found a significant positive effect on growth and unemployment, while three found either a small or hard-to-predict effect. The US President's Council of Economic Advisers' most recent assessment of the ARRA found that, as of mid-2011, there would’ve been between 2.2 million and 4.2 million fewer Americans employed if the bill had never passed.

The graphics below, from the CEA report, highlight the impact of ARRA on the post-ARRA GDP and employment creation.

But the recession has surely taken a toll on the US economy. The graphic below shows that the Bush era tax cuts and lost revenues from the economic downturn are the major contributors to America's massive fiscal deficit.

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