Reviewing the Crash of 2008 and the ensuing recession

How did it all come about? How do things now (under Obama) compare to before? Why did we not see it coming?

We will review various graphs of economic data. We will discuss what the graphs does show us, and what we can not see.

Draft: March 2010

 

GDP

Since its common to think of a recession in terms of GDP, we'll graph GDP first.

The crash of 2008 is quite visible by the drop. But with hindsight, the bubble from 2003 to 2008 is also visible. We can notice that the crash only dropped us as low as the pre-bubble trend.
Frequently growth trends tell us more than absolutes, so we will look at GDP growth
For reference, we marked in average GDP growth under Carter. This hints a a possible problem. In the first decade of the century, GDP growth barely maintained the same level as under Carter.

Data Sources

 

Employment & Incomes

When we look at job growth the bubble is very apparent. It peaks in early 2006 and declines thereafter.
For comparison we mark the average employment growth under both Clinton and Carter (almost the same value.) This gives us a hint about the economic crisis. Job growth never reached the level it needed to.
The problem becomes even more apparent when we look at incomes. By looking at the incomes of the 40th and 60th percentiles, we can see that middle class incomes were declining for most of the Bush years. The bubble apparent in 2005 and 2006 barely returned incomes to their Clinton era levels. We can also see that after the bubble burst, incomes did not fall as low as the pre-bubble trend would have predicted.
 
We can put employment and incomes together to see how wealth has been reaching the middle class. Again we see a decade of stagnation with just a slight bubble in 2005 through 2006. Again we see than in 2009 wealth to the middle class returned to the same level projected by the 2000 to 2005 trend.
 
We can put the information above together by asking what share of the GDP were the middle class getting. For ease, we will look at just 60th percentile group. This gives us more hints about the bubble and crash. The share of the GDP going to the middle class declined for 8 years.
At the onset of the bubble the share going to the middle class decreased even faster. This acceleration occurred again just before the bubble burst.
The above hint suggests that the declining share of income to the middle class might imply a bubble. From the CPBB graphs we see even stronger evidence that bubbles are most evident in share of income data. Both the dot-com crash of 2000 and the housing crash of 2008 are preceded by a rapid rise in ratio of income going to the top 1%. The weak economy of the late 1980s through early 1990s are also characterized by spikes in the ratio of earning going to the top 1%. The CPBB graph hints that the best predictor of a bubble is the ratio of income going to the top 1%. This number rises when bubbles are forming.

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Observations and Conclusions

  • Neither GDP, Employment, nor Income trends clearly indicate the onset of the bubble. But we hindsight we can identify the bubble in each trend.
  • Each of these trends shows hints of a weak economy for the entire first decade of the century.
  • The first two years of the economy under Obama were higher performing than either the pre-bubble Bush era trends, or the bubble burst trends would project. Because the trends are higher than projected, we can not blame the poor state of the economy on Obama.
 
 

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