This month marks the 10 year anniversary of the start of the Great Recession—the largest and longest economic downturn since the Great Depression. Beginning in December 2007 and ending in June 2009, the recession caused gross domestic product (GDP), the broadest measure of the value of goods and services produced in the U.S. economy, to contract by a total of 4%. The unemployment rate doubled, reaching 10%, millions of discouraged workers gave up looking for work entirely, and millions more who wanted full-time work could only find part-time employment. Wage growth was virtually flat, as has been for decades. Household consumption fell by just over 3% and business spending on investment plunged over 25%.
All of these data paint a picture of economy that was hit hard by the bursting of the housing bubble and ensuing financial crisis in 2008. But once the recession ended, the economy experienced an exceptionally slow and long recovery. There has been no shortage of arguments as to why the recovery was slow. But it was not until recently that the labor market returned to full employment and GDP reached its potential level. What did this recession and subsequent slow growth cost the average American worker?
Potential GDP is the economy’s productive speed limit. More technically, it is an estimate of what the economy could produce if it were operating at maximum capacity, with all labor and capital resources fully utilized. The difference between actual GDP and its potential is what economists call the output gap. Using this measure, it is possible to calculate the monetary cost of a decade of economic stagnation. For each worker, the cost of the recession and slow recovery—the value of the output gap—was $2,722 per year, adjusted for inflation. That means that for the decade since December 2007, the average worker became $27,220 poorer in terms of the goods and services they could have purchased, or in terms of income. Even if you exclude the recession years, during the slow recovery, the average worker was $2,376 poorer each year than they would have been had the economy recovered rapidly, for a grand total of $19,008.
Why did the recession last so long and why was the recovery back to full employment so long and slow? Financial bubbles usually leave long lasting scars, as families and businesses see the value of their balance sheet deteriorate and deleverage—paying off old debt instead of engaging in new consumption. But the biggest reason for the slow recovery was largely political: Congress engaged in extreme obstructionism, making it difficult or impossible for the Obama administration to pass a fiscal stimulus package that was large enough to offset the contraction in private spending. The American Recovery and Reinvestment Act, which Obama passed in February 2009, devoted $787 billion over two years to a variety of programs, including income assistance for the unemployed, infrastructure and education spending, and tax cuts. But given the size of the recession, this was far too little to bring economic growth back to its potential in such short time frame; by my calculations, it needed to be almost twice as large.
For the remainder of the Obama administration, Congressional Republicans put their political interests and those of their donors ahead of the health of the economy by forcibly preventing further stimulus measures. This led to extreme political polarization where Republicans simply said “no” to anything that was not in their own political self-interest or would have jeopardized their ability to receive campaign funding from wealthy donors. After all, more government spending would likely have meant tax increases on the very wealthy. In other words, the interests of the economic elite—the 1%—outweighed the interests of the average worker, costing them over $27,220 each during the past decade. Republican politicians’ public justification, which included fancy and scary charts, revolved around the menace of rising budget deficits.
Now with a Republican president and Congress, these same politicians appear entirely unconcerned with the size of the deficit, as can be seen with the Tax Cuts and Jobs Act of 2017. These tax cuts, mostly for large corporations and wealthy individuals, will add around $1 trillion to the deficit over the next decade, without doing anything for economic growth or the incomes of average households. Of course, the Trump Administration and Congress are loudly taking the credit for falling unemployment rates, higher GDP growth rates, and rising stock prices. But these are the legacy of longer term trends, not a brief spout of regulatory rollback and the growing possibility of a regressive tax cut.
This hypocrisy lays bare the political polarization and outright lies that are now dominating political and economic discourse. Without putting the interests of average workers and the economy ahead of those of the 1%, U.S. economic growth will continue to limp along, with over 90% of the income gains going to the wealthiest Americans. Instead of spending $1 trillion on tax cuts for the wealthy, this money could be used to fund a second New Deal, which could create government-guaranteed employment and job training programs, repair the nation’s crumbling infrastructure, subsidize college education, and provide universal child and health care, to name a few possible public investments. Of course $1 trillion would not cover the costs for all of these programs, but any combination would have significantly more positive impacts on the U.S. economy and provide economic security to vulnerable segments of the population.
The costs of economic stagnation, enabled by political polarization and obstructionism, made the average worker $27,220 poorer since December 2007. The policies suggested by current Republicans, like the sham of Trump’s tax cut and the planned cutting of social insurance programs, will only make this cost larger. It will be interesting to see if these misguided and harmful policies will have any effect on the 2018 midterm elections and beyond.