Kling on Causes of Depth of Recession

Some of these causes are better than others; The "innovation slump" is a huge factor, because government kept partying like it was 1999, and the private sector could not continue to feed the beast without the illusory housing boom, which (unlike the internet boom) did not do anything to improve productivity.  Productivity is the only route to real and lasting wealth, and a higher standard of living, as it has been for millennia. Lately, the government has been doing everything it can think of to kill the golden goose.
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If I had a convincing explanation for the depth of this recession, I would shout it from the rooftops. Instead, let me toss out a few ideas, in no particular order of importance or plausibility.

1. The huge transfer of wealth to failed banks sucked a lot of energy out of the economy. In other words, the bank bailouts that are credited with keeping things from getting worse are in fact what made things worse.

2. The bloated housing and financial sectors created broader distortions in the economy. If the value of New York City's exports of financial services falls, then that has all sorts of effects. The city's nontraded goods and services sector is adversely affected. Its imports from other parts of the U.S. and the rest of the world fall. And so on. All sorts of trading patterns need to change, and that requires considerable recalculation.
3. Part of the adjustment process in the economy involves physical relocation. The nature of the collapse in the housing market means that relocation costs go up, which reduces the economy's capacity to adjust.
4. Since 2000, the economy has been in an innovation slump. The human genome project yielded less immediate benefits than expected. Progress in computer and communications technology has become evolutionary, not revolutionary. Nanotechnology is far too immature to create major new business opportunities.
Only when an innovation reaches the point where its economic impact can be felt, as happened with personal computers and the Internet in the 1990's, will lots of new businesses be created. Remember that in 1987 Robert Solow quipped that "we see computers everywhere but in the productivity statistics." That soon changed. Today, one could argue that we see genome decoding and nanotech research everywhere but in the productivity statistics.

The recent innovation slump was disguised by the housing boom. That is, if you take away the housing boom, you would have seen a steady increase in unemployment, due to the lack of new business formation. Instead, the housing boom caused unemployment to fall, and the crash caused unemployment to shoot up.

5. We ran into a "limits-to-growth" problem with energy. Tightness in the oil market means that we have to convert to less oil-intensive patterns of consumption growth and productions. Just as in the 1970's, this creates big adjustment problems.
Of course, it is possible to have several of these problems at once.




http://econlog.econlib.org/archives/2010/01/why_such_a_deep.html