Impact of the Financial Crisis on Long-Term Growth

Barry Bosworth

Working Papers, Center for Retirement Research at Boston College from Center for Retirement Research

Abstract: This study examines the potential impact of the 2008-2009 financial crisis on economic growth. Expectations of future growth are critical to evaluating of the sustainability of overall budget trends and the financial condition of the Old-Age Survivors and Disability Insurance (OASDI) and Medicare trust funds. The paper includes an assessment of the experience of other industrial economies with similar situations in earlier decades. The Nordic countries achieved a relatively complete recovery within a period of 5-10 years, but the slump in economic growth in Japan has continued for over a quarter century. The analysis of the current experience in the United States focuses on recent changes in the supply of labor and capital and changes in the growth of total factor productivity (TFP). The large decline in the labor force participation rate is largely the result of demographic changes and not the recession. Similarly, the growth of TFP has slowed in recent years, but most studies perceive it as predating the onset of the recession. The paper finds that: - Even though they may not be directly due to the financial crisis, expectations have been cut back in a wide range of analyses of future growth prospects. - The recent decline in labor force participation is dominated by demographic changes that will continue in future decades. Only a small portion appears to be related to cyclical factors. - The growth in TFP has also slowed, but the change predates the financial crisis and is also likely to continue in future years. The policy implications of the findings are: - The economic assumptions that underlie current projections of government expenditure programs are likely to be overly optimistic, particularly because the changed expectations are not cyclical or temporary in nature.

Pages: 30 pages
Date: 2015-06
New Economics Papers: this item is included in nep-fdg and nep-lab
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