The Impact of the Financial Crisis on Long-Term Economic Growth

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This study examines the potential impact of the 2008-09 financial crisis on economic growth. Expectations of future growth are critical to the evaluation 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.