Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis

Robert E. Hall

Chapter in NBER book NBER Macroeconomics Annual 2014, Volume 29 (2015), Jonathan A. Parker and Michael Woodford, editors (p. 71 - 128)
Conference held April 11-12, 2014
Published in July 2015 by University of Chicago Press
© 2015 by the National Bureau of Economic Research
in NBER Book Series NBER Macroeconomics Annual

The financial crisis and ensuing Great Recession left the U.S. economy in an injured state. In 2013, output was 13 percent below its trend path from 1990 through 2007. Part of this shortfall—2.2 percentage points out of the 13—was the result of lingering slackness in the labor market in the form of abnormal unemployment and substandard weekly hours of work. The single biggest contributor was a shortfall in business capital, which accounted for 3.9 percentage points. The second largest was a shortfall of 3.5 percentage points in total factor productivity. The fourth was a shortfall of 2.4 percentage points in labor-force participation. I discuss these four sources of the injury in detail, focusing on identifying state variables that may or may not return to earlier growth paths. The conclusion is optimistic about the capital stock and slackness in the labor market and pessimistic about reversing the declines in total factor productivity and the part of the participation shortfall not associated with the weak labor market.

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This paper was revised on May 27, 2014

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This chapter first appeared as NBER working paper w20183, Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis, Robert E. Hall
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