Since 2008, the fed­eral gov­ern­ment has exe­cuted a grand exper­i­ment on our econ­omy and our per­sonal futures. The Bush and Obama admin­is­tra­tions dra­mat­i­cally increased gov­ern­ment spend­ing financed entirely through debt with the goal of cre­at­ing sub­stan­tially greater GDP growth and sub­stan­tially lower unem­ploy­ment than would oth­er­wise be the case under a stan­dard eco­nomic recov­ery. Indeed, in its Jan­u­ary 2009 white paper, the Obama eco­nomic team claimed that every addi­tional dol­lar the gov­ern­ment bor­rowed and spent would increase GDP growth by up to $1.57. Said more sim­ply, Team Obama claimed that gov­ern­ment bor­row­ing and spend­ing could cre­ate a 57% growth rate.

Two years after this exper­i­ment went into effect, we are now in a posi­tion to make a pre­lim­i­nary judg­ment of its results.

Since WWII, the United States has under­gone four com­pa­ra­ble reces­sions where the econ­omy lost 5% or more of its Gross Domes­tic Prod­uct (GDP)—1948, 1954, 1958 and 1980–1982. The GDP and unem­ploy­ment charts below cover the entire busi­ness cycles for the 1948, 1954 and 1958 reces­sions start­ing with the reces­sion and fol­lowed by the recov­ery growth and then mature growth peri­ods before the next reces­sion. Because the expan­sion fol­low­ing the 1980–1982 reces­sion was so long, those charts end in 1986 after the econ­omy entered its mature growth period. We are still in the midst of a GDP growth period fol­low­ing the 2008–2009 reces­sion, so that chart ends at the present.

In the stan­dard busi­ness cycle, you gen­er­ally start with a reces­sion­ary drop in the GDP, fol­lowed by a period of rapid recov­ery GDP growth, and then slow­ing down into a period of more mod­er­ate GDP growth until the next reces­sion. Unem­ploy­ment gen­er­ally lags behind move­ment of the GDP so that reces­sion­ary unem­ploy­ment gen­er­ally peaks after the GDP starts its recov­ery and then con­tin­ues to drop after GDP growth slows down after the recov­ery. From the charts below, you can see that the 1948, 1954, 1958 and 1980–1982 reces­sions gen­er­ally fol­low the stan­dard busi­ness cycle:

I. RECESSIONS

1949 reces­sion

GDP growth

Unem­ploy­ment

The recov­ery period in the 1948 reces­sion cov­ered seven quar­ters, GDP growth ranged from between 5.1% and 17.2% with an aver­age of 10.5%, and the unem­ploy­ment rate fell from 7.9% to 3.3% for a total drop of 4.4%

1954 reces­sion

GDP growth

Unem­ploy­ment

The recov­ery period in the 1954 reces­sion cov­ered 5 quar­ters, GDP growth ranged from between 4.6% and 12% with an aver­age of 7.4%, and the unem­ploy­ment rate fell from 7.5% to 4.1% for a total drop of 3.4%.

Note: For the pur­poses of this analy­sis, the recov­ery period starts with at least two straight quar­ters of GDP growth and does not count the first quar­ter of growth if it is less than 1% because this quar­ter is a mix­ture of both reces­sion and recov­ery and its inclu­sion will skew the GDP growth aver­age for the recov­ery period.

1958 reces­sion

GDP growth

Unem­ploy­ment

The recov­ery period in the 1958 reces­sion cov­ered 5 quar­ters, GDP growth ranged from between 2.5% and 10.5% with an aver­age of 8.1%, and the unem­ploy­ment rate fell from 7.5% to 5.9% for a total drop of 1.6%

1980–1982 dou­ble dip recession

GDP growth

Unem­ploy­ment

The recov­ery period in the 1980–1982 dou­ble dip reces­sion cov­ered 6 quar­ters, GDP growth ranged from between 5.1% and 9.3% with an aver­age of 7.7%, and unem­ploy­ment fell from 10.4% to 7.1% for a total drop of 3.3%

Of note, the 1980–1982 reces­sion is fun­da­men­tally dif­fer­ent from the other reces­sions in that the econ­omy suf­fered from expo­nen­tially higher infla­tion and inter­est rates.

2008–2009 reces­sion

GDP growth

Unem­ploy­ment

There is no recov­ery period fol­low­ing the 2008–2009 reces­sion com­pa­ra­ble to the pre­vi­ous post-​​WWII reces­sions of this sever­ity. Dur­ing the seven quar­ters fol­low­ing the reces­sion­ary GDP drop, GDP growth ranged from between 1.6% and 5.0% with an aver­age of 2.8%, and the unem­ploy­ment rate fell from 10.1% to 9.0% for a total drop of 1.1%.

Of note, the GDP growth dur­ing the past 7 quar­ters is lower than the mature growth fol­low­ing the recov­er­ies from the pre­vi­ous reces­sions reviewed above. The unem­ploy­ment rate has only mar­gin­ally dropped over his period and most if not all of this drop is because mil­lions of dis­cour­aged unem­ployed are no longer look­ing for work and are not counted in this statistic.

The unem­ploy­ment sit­u­a­tion is par­tic­u­larly trou­bling. Hir­ing has col­lapsed to about 80% of that dur­ing the mod­er­ate growth years of the pre­ced­ing Bush Admin­is­tra­tion, and job open­ings have fallen even further.

As a result, the num­ber of Amer­i­cans unem­ployed for 27 weeks or more has risen to a mod­ern record of over 4 mil­lion, nearly dou­ble that of the depths of the 1980–1982 recession.

These facts sug­gest that the United States has yet to enter an eco­nomic recov­ery from the 2008–2009 down­turn and instead remains in the trough of an L shaped reces­sion like the Great Depression.

II. STIMULUS

Some com­men­ta­tors have sug­gested that pre­vi­ous gov­ern­ments also employed gov­ern­ment spend­ing “stim­u­lus” to pull out of other post-​​WWII reces­sions. An exam­i­na­tion of per-​​capita gov­ern­ment spend­ing over the reces­sions dis­cussed above does not sup­port this contention.

FY1948–FY1960

This period cov­ers the 1949, 1954 and 1958 reces­sions. The sud­den jump in spend­ing in 1951 was to pay for the Korean War and then for a large stand­ing mil­i­tary dur­ing the Cold War. The Tru­man and Eisen­hower admin­is­tra­tions did not use Key­ne­sian stim­u­lus dur­ing the reces­sions. Indeed, Eisen­hower reduced per capita spend­ing dur­ing the 1954 reces­sion to main­tain a bal­anced budget.

FY1974–FY1986

This period cov­ers the rapid expan­sion fed­eral spend­ing start­ing with the post-​​Watergate elec­tion of a hard left Demo­c­ra­tic Con­gress through the com­ple­tion of the Rea­gan expan­sion of the mil­i­tary in 1986. As you can see, the increase in spend­ing is pretty even and nei­ther Carter or Rea­gan employed a Key­ne­sian stim­u­lus dur­ing the 1980–1982 dou­ble dip recession.

FY2000-​​FY2011

This period cov­ers the increase in spend­ing dur­ing the George W. Bush and Barack Obama admin­is­tra­tions. As you can see, both Bush and Obama dra­mat­i­cally increased the rate of gov­ern­ment spend­ing from fis­cal year 2009 to fis­cal year 2011. Bush increased spend­ing to bail out the banks, but Obama expressly attempted a Key­ne­sian stimulus.

III. SUMMARY

The data make clear that the Bush/​Obama sharp increase in gov­ern­ment bor­row­ing and spend­ing did not achieve the above aver­age recov­ery pre­dicted by the Obama eco­nomic team in 2009 nor did it come close to match­ing his­toric busi­ness cycle recov­er­ies with­out the “stim­u­lus” of added gov­ern­ment spend­ing and bor­row­ing. Indeed, it is ques­tion­able whether the United States econ­omy is cur­rently in an eco­nomic recov­ery as that term is gen­er­ally under­stood. Instead, the peo­ple are left with an added $4 tril­lion in debt and $1.5 tril­lion deficits as far as the eye can see.

Is it too early to declare the Bush/​Obama bor­row­ing and spend­ing exper­i­ment an extremely expen­sive failure?

Cred­its: