To understand why the recovery is so slow, you have to understand what caused the recession in the first place. he root causes are really not hard to understand:
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The combination of the fed keeping interest rates artificially low, China flooding the west with investment dollars due to its savings policy, and new financial derivatives caused a large asset bubble.
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Money that couldn’t find good returns due to extremely low interest rates moved into higher-risk, higher return investments like mortgages.
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The rise of computing power and the speed of communications caused a worldwide financial system to explode in complexity and ultimately, risk.
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Governments played along by securitizing mortgages, further shielding banks from risk so they would loan more money to more people.
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The result of low interest rates, easy credit, and the elimination of risk signals caused a whole lot of bad mortgages to be given out, which caused real estate to explode in quantity and price.
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Consumers saw their on-paper wealth skyrocket as their homes went up in value. That ‘wealth effect’ caused them to spend more, taking out second mortgages or loading up on credit card debt.
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Governments spent more too, racking up big debts all over the world.
The result was a phantom economy - people thought they were far wealthier than they were. So they spent as though they were wealthy, and businesses ramped up production to supply the demand.
Then came the crash - first, sectoral declines in real estate caused bankruptcies. Extended investors faced margin calls. About this time, all the holders of that mortgage debt started to realize that not only were their portfolios worth a fraction of what they thought, but that the risk component of their holdings was virtually unknown because it had been abstracted away by numerous intermediate transactions. This caused the financial system to come to a crashing halt - no one knew good debt from bad, and money simply stopped flowing.
This calamity caused a panic in governments, the media, and the public. Fear set in, and consumer spending slowed to a crawl. Mortgages stopped being handed out, and the real estate industry collapsed even further.
The bottom line is that everyone is less wealthy than they thought they were. As a result, they are spending less (rationally so). But an economy built in the good times has too much supply for the bad times. So layoffs happen, businesses shut down, and spending declines even further.
Governments tried to break this vicious cycle through fiscal stimulus and through monetary stimulus, thinking that if they just got lots of money into the economy again, people would start spending, and once the economy started recovering, the fear would go away and the old economy would return.
There are several problems with that happy scenario. The first is that it ignores the fact that current behavior is rational. People aren’t spending less because they’re scared - they’re spending less because reality slapped them in the face and informed them that their previous habits were based on a mirage. If you think that the $800,000 in equity in your home is going to pay for your retirement, you have no need to save. So you spend your whole paycheck. If your house equity suddenly drops to $300,000, you go “Eek!” and start putting away more money from each check. Your consumption declines. Permanently.
The second problem with the stimulus is that it requires borrowed money, and the root cause of the recession is that the loss of the asset bubble put private and government balance sheets deep into the red. When governments are defaulting on debt in Europe, running up similar-sized debt in America is just going to scare people. Also, people aren’t stupid - they know that deficit spending today means higher taxes or reduced services tomorrow. So the economy tends to see borrowed money as roughly equivalent to a tax - and they consume less accordingly, wiping out the effects of the stimulus.
The third problem with the stimulus is that it doesn’t address the fact that during the bubble there wasn’t just too much production - there was too much of the wrong kind of production. Huge malinvestment in industries that are no longer sustainable at bubble sizes. Construction, auto manufacturing, government itself. These and other industries are bigger than they should be, and no amount of stimulus will fix that. What will fix it is to allow market forces to work and clear out the dead wood and free up resources for more productive use. It will be painful, but it has to be done. But instead, governments have been borrowing money to prop up these unsustainable expenditures, which is one reason why you’re not seeing a recovery.
These characteristics are common to governments around the world to one degree or another. The U.S. in particular has additional hurdles added by the ideology of the Obama administration. The health care plan was horribly timed - it added a trillion dollars in new costs and a huge amount of regulatory uncertainty to the economy at the worst time possible. A big financial reform bill was passed that’s a messy web of new regulations - many still to be written by the bureaucrats. This has also slowed business investment.
The Obama administration has not pursued growth policies aggressively, such as trade expansion or deregulation. Hell, even Jimmy Carter recognized the need to deregulate the economy when stagflation put him in a corner. The EPA under Obama keeps making threatening noises about regulating CO2, Obama’s National Labor Relations Board just killed a 2,200 job expansion by Boeing because they wanted to expand in a non-union state, and now Obama wants another couple of trillion dollars in taxes levied on the ‘rich’ to maintain a government that is too large for the new economy. The Obama administration has shut down domestic offshore drilling and exploration, and the Democrats in Congress haven’t passed a bloody budget in almost two years, which causes even more uncertainty in the business community.
Just about everything this administration has done is anti-growth, and its stimulus had the effect of ‘saving’ government jobs by destroying private sector jobs.
But even if he was the bestest, pro-business leader around, the economy would still be growing slowly (just not as slowly as it is now). This is a ‘balance sheet’ recession, and like Japan’s, it’s going to last a long time.
