INTERNATIONAL ECONOMIC PERFORMANCE

SINCE THE STOCK MARKET BUBBLE

A JOINT ECONOMIC COMMITTEE STUDY

Vice Chairman Jim Saxton (R-NJ)

Joint Economic Committee

United States Congress

March 2004

Joint Economic Committee

1537 Longworth House Office Building

Washington, DC 20515

Phone: 202-226-3234

Fax: 202-226-3950

Internet Address:

http://www.house.gov/jec/

Executive Summary

In the 1990s, a worldwide stock market bubble ignited a rush among firms not only in the United States, but 

also in other major developed economies (the European Union, Japan, and Canada) to invest in new equipment, 

software, and nonresidential structures. After the bubble burst, it became apparent that many investments in 

these major developed economies were not economically viable. This overhang of bad investments has taken 

years to liquidate, retarding new investment in each of these economies. Consequently, every major developed 

economy has suffered from at least one quarter of zero or negative real GDP growth since 2000. Declining 

investment rates have disproportionately affected the manufacturing sectors in each of these major developed 

economies, causing significant losses of manufacturing output and jobs.

Despite a stock market crash, economic slowdown and recession, terrorist attacks, wars, and other adverse 

shocks, the United States has outperformed, on balance, the other major developed economies in three key 

measures – real GDP growth, industrial production, and the decline in its unemployment rate after it had peaked 

– in recent years. The United States has had the largest cumulative increase in its real GDP after its downturn 

had ended. Although unemployment rates have increased in all major developed economies, the United States 

has had the largest post-peak decline in its unemployment rate of 0.8 percentage points. The most recent U.S. 

unemployment rate of 5.6 percent is significantly below the most recent unemployment rates of 8.0 percent in 

the European Union or 7.4 percent in Canada. Moreover, the average duration of unemployment is much 

shorter for jobless workers in the United States than in either the European Union or Japan.

In every major developed country, the bursting of the bubble slowed economic growth. Corporate profits 

withered, capital gains evaporated, and the growth in other sources of income decelerated, causing income tax 

collections to fall as a percent of GDP from 2000 to 2003. Consequently, government budget balances 

deteriorated as a percent of GDP, whether or not countries tried to revive economic growth through tax 

reductions. Indeed, the size of the deterioration in the general government budget balances appears more 

closely related to higher general government outlays rather than lower general government receipts.
INTERNATIONAL ECONOMIC PERFORMANCE 

SINCE THE STOCK MARKET BUBBLE 

I. INTRODUCTION 

A previous Joint Economic Committee (JEC) study, Economic Repercussions of the 

Stock Market Bubble, examined the effects of the bursting of the U.S. stock market bubble in the 

first quarter of 2000 on the subsequent performance of the U.S. economy. This JEC study shows 

that the stock market bubble was a worldwide phenomenon. Many of the sudden and unexpected 

favorable developments that fueled optimism among stock market participants about the future 

returns from purchasing shares were general to all major developed economies rather than 

specific to the United States. Given the mobility of financial capital among major developed 

economies, it is not surprising that stock market participants bid share prices higher in stock 

exchanges around the world. 

Optimism about future stock returns fed optimism among entrepreneurs and firm 

managers not only in the United States but also in other major developed economies specifically 

the European Union (EU)1

, Japan, and Canada. Entrepreneurs and firm managers expected that 

new investments in capital assets (i.e., equipment, software, and structures used by firms to 

produce goods and services) would be highly profitable. Rising share prices made it easy for 

firms to borrow or to issue new shares to finance such investments. Swelling optimism and easy 

finance ignited capital asset investment booms in each of these major developed economies. 

Share prices peaked globally between December 1999 and September 2000. After the 

bubble burst, it became apparent that many investments in capital assets in these major 

developed economies were not economically viable. This overhang of bad investments has taken 

years to liquidate, retarding new investment in capital assets in each of these economies. 

Consequently, every major developed economy has suffered from at least one quarter of zero or 

negative real GDP growth since 2000. Since capital assets are generally composed of 

manufactured goods, declining investment rates have disproportionately affected the 

manufacturing sectors in each of these major developed economies, causing significant losses of 

manufacturing output and jobs. 

Despite a stock market crash, economic slowdown and recession, terrorist attacks, wars, 

and other adverse shocks, the United States has outperformed, on balance, the other major 

developed economies in three key measures – real GDP growth, industrial production, and the 

decline in its unemployment rate after it had peaked – in recent years.2

 Among the major 

developed economies, the United States has had the largest increase in its real GDP of 7.8 

percent after its downturn had ended.3

 The United States had the second smallest high-to-low 

 

1

 Economic data for the European Union incorporates economic data from all 15 member-states of the European 

Union (i.e, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, 

Netherlands, Portugal, Spain, Sweden, and the United Kingdom). 

2

 Unless otherwised indicated herein, economic data regarding Canada is from Statistics Canada; the European 

Union, Eurostat; Japan, Ministry of Public Management, Home Affairs, Posts and Telecommunications, Statistics 

Bureau; and the United States, U.S. Department of Commerce, Bureau of Economic Analysis. 3

 Unless otherwise indicated herein, GDP growth rates are seasonally adjusted annualized rates. 
PAGE 2 A JOINT ECONOMIC COMMITTEE STUDY

contraction in industrial production amounting to 6.7 percent.4 Since its low, U.S. industrial 

production has climbed by 5.0 percent. Although unemployment rates have increased in all 

major developed economies,5 the United States has had the largest post-recession decline in its 

unemployment rate of 0.8 percentage points. The most recent U.S. unemployment rate of 5.6 

percent remains significantly below the most recent unemployment rates of 8.0 percent in the 

European Union or 7.4 percent in Canada.6 Moreover, the average duration of unemployment is 

much shorter for jobless workers in the United States than in either the European Union or 

Japan.7

In every major developed country,8

 the bursting of the bubble slowed economic growth. 

Withering corporate profits, evaporating capital gains, and decelerating growth in other sources 

of income caused income tax collections to fall as a percent of GDP from 2000 to 2003. 

Consequently, general government budget balances deteriorated as a percent of GDP, whether or 

not countries tried to revive economic growth through tax reductions.9

 Indeed, the size of the 

deterioration in the general government budget balances appears more closely related to a trend 

toward higher general government outlays rather than lower general government receipts. 

II. WORLDWIDE STOCK MARKET BUBBLE 

Stock market bubbles begin when sudden and unexpected favorable developments cause 

stock market participants to become more optimistic about the future returns from purchasing 

stock. Many of the sudden and unexpected favorable developments (e.g., victory in the Cold 

War and the invention of the World Wide Web and the Internet browser) that inflated a stock 

market bubble in the United States during second half of 1990s were general rather than specific 

to the United States. Given the mobility of financial capital among major developed economies, 

it is not surprising that stock market participants bid share prices higher in stock exchanges 

around the world. Table 1 shows extraordinarily large gains in share price indices in every major 

developed economy during the 1990s with the exception of Japan. 

 

4

 Unless otherwise indicated herein, industrial production indices are seasonally adjusted. 

5

 Unless otherwise indicated herein, unemployment rates are seasonally adjusted. 6

 This study incorporates economic data available on or before March 16, 2004. 

7

 OECD website at 

http://www1.oecd.org/scripts/cde/queryScreen.asp?DSET=CDELFS_C1T15I&SETNAME=Distribution+of+unemp

loyment+by+duration&DBASE=LFS_INDICATORS&EMAIL=&DBNAME=Labour+Market+Statistics+%2D+IN

DICATORS. 

8

 The major developed countries (which are also known as the G-7) are: Canada, France, Germany, Italy, Japan, the 

United Kingdom, and the United States. This study uses individual member-state data rather than European Union 

data for general government budget balance comparisons because government spending and tax decisions remain 

the primary responsibility of the member-states rather than the European Union. In 2002, the combined GDP of 

France, Germany, Italy, and the United Kingdom was 70.8 percent of the GDP of the entire European Union. 

9

 For consistency among cross-country comparisons, this study adopts Organization for Economic Cooperation and 

Development (OECD) accounting practices for government finance. OECD practices differ from the practices of 

the Congressional Budget Office (CBO) or the Office of Management and Budget (OMB). First, years are calendar 

years rather than fiscal years. Second, receipts, outlays, and government net lending of all levels of government 

(federal or national, state or provincial, and local) within a country are consolidated into a single general government 

account. CBO and OMB typically report financial data for the federal government (without consolidating federal 

data with state and local government data). Data for calendar year 2003 are based on actual data for the first, 

second, and third quarters of 2003 and OECD projections for the fourth quarter of 2003 dated December 2003. 
INTERNATIONAL ECONOMIC PERFORMANCE SINCE THE STOCK MARKET BUBBLE PAGE 3

Table 1 – Global Stock Market Bubble 

Major Developed 

Country Stock Index Trough Date Trough Peak Date Peak 

Percent 

Increase 

Trough to 

Peak 

Trough Date Trough

Percent 

Decline 

Peak to 

Trough

Canada Toronto 300 

Composite October 16, 1990 3,010 September 1, 2000 11,389 278.4% October 9, 2002 5,695 50.0% 

France Paris CAC 40 January 14, 1991 3,168 September 4, 2000 6,922 118.5% March 12, 2003 2,403 65.3% 

Germany Frankfort Xetra 

Dax January 16, 1991 1,323 March 7, 2000 8,065 509.7% March 12, 2003 2,203 72.7% 

Italy Milan Mibtel 

General November 23, 1993 9,044 March 6, 2000 34,819 285.0% March 12, 2003 15,125 56.6% 

Japan Nikkei 225 

Average September 16, 1992 14,309 April 12, 2000 20,833 45.6% April 28, 2003 7,608 63.5% 

United Kingdom Financial Times 

100 September 28, 1990 1,990 December 31, 1999 6,930 248.2% March 12, 2003 3,287 52.6% 

United States Dow Jones 

Industrial October 11, 1990 2,365 January 14, 2000 11,723 395.7% October 9, 2002 7,286 37.8% 

United States S&P 500 October 11, 1990 295 March 24, 2000 1,527 417.1% October 9, 2002 777 49.1% 

United States NASDAQ 

Composite October 16, 1990 325 March 10, 2000 5,049 1451.5% October 9, 2002 1,114 77.9% 

Stock market bubbles affect non-financial sectors of the economy. Optimism among 

stock market participants about the future returns from shares causes entrepreneurs and firm 

managers to become more optimistic about the future returns from investments in new capital 

assets. Simultaneously, rising share prices increase the market value of firms. These higher 

market values make it easier for firms to borrow or issue shares to finance such investments. 

Thus, swelling optimism and easy finance prompt firms to increase their investment in new 

capital assets. 

As a result, stock market bubbles cause business investment (i.e., private fixed nonresidential investment) to increase. Even in Japan, whose economy still suffered throughout the 

1990s from the bursting of a Japan-specific stock market bubble in 1989, optimism about the 

future profitability of investing in capital assets for producing goods and services for 

international markets, if not for the Japanese market, accelerated Japan’s investment rate. 

This impact of the stock market bubble on investment was visible in all major developed 

economies. The U.S. gross private fixed nonresidential investment rate peaked at 12.6 percent of 

GDP during the last three quarters of 2000. The European Union’s gross fixed nonresidential 

investment rate peaked at 15.9 percent of GDP during the fourth quarter of 2000.10 Japan’s gross 

private fixed nonresidential investment rate peaked at 16.5 percent of GDP during the fourth 

quarter of 2000. Canada’s gross private fixed nonresidential investment rate peaked at 13.1 

percent of GDP during the fourth quarter of 1998 and then remained relatively high through the 

third quarter of 2001. 

 

10 Gross private fixed nonresidential investment data are not available for the European Union. Because of this data 

limitation, this study uses gross fixed nonresidential investment data, which include gross government fixed 

nonresidential investment, instead of gross private fixed nonresidential investment data for the European Union. 

Since quarterly changes in gross government fixed nonresidential investment tend to be very small relative to 

quarterly changes in gross private fixed nonresidential investment, trends in gross fixed nonresidential investment 

are indicative of trends in gross private fixed nonresidential investment. 
PAGE 4 A JOINT ECONOMIC COMMITTEE STUDY

III. DECLINING INVESTMENT RATES CAUSE WORLDWIDE ECONOMIC 

CONTRACTION 

The rush to invest caused some firms to acquire too many capital assets to produce goods 

and services to meet demand. This is known as overinvestment. Moreover, other firms 

acquired the wrong capital assets to produce goods and services to meet demand. This is known 

as malinvestment. Consequently, overinvestment and malinvestment became widespread 

during the late 1990s in all major developed economies.

 After the stock market bubble burst, overinvestment and malinvestment caused firms in 

affected industries to slash new investment. The U.S. gross private fixed nonresidential 

investment rate contracted by 2.7 percentage points to a low of 10.0 percent of GDP during the 

first and second quarters of 2003. The European Union’s gross fixed nonresidential investment 

rate slipped by 1.8 percentage points to a low of 14.1 percent of GDP during the third quarter of 

2003. Japan’s gross private fixed nonresidential investment rate dropped by 2.3 percent to a low 

of 14.2 percent during the second and third quarters of 2002. Canada’s gross private fixed 

nonresidential investment rate fell by 2.5 percentage points to a low of 10.7 percent of GDP 

during the second quarter of 2003 (see Graph 1). 

⇒ Real GDP growth. Declining investment rates have inhibited economic growth. Since 

2000, every major developed economy has suffered from at least two quarters of zero or 

negative real GDP growth. Among the major developed economies, Japan had the 

largest peak-to-trough contraction in real GDP. 

• United States. U.S. real GDP contracted by 0.1 percent from the third quarter of 

2000 to the third quarter of 2001. 

Graph 1 - Contraction in Investment Rates

(Peak-to-Trough)

-2.7%

-1.8%

-2.3%

-2.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

United States - Gross

Private Fixed

Nonresidential Investment

Rate (SA)

European Union - Gross

Fixed Nonresidential

Investment Rate (SA)

Japan - Gross Private

Fixed Nonresidential

Investment Rate (SA)

Canada - Gross Private

Fixed Nonresidential

Investment Rate (SA)

Economy

Peak-to-Trough Contraction in Investment Rate (SA) in 

Percentage Points of GDP
INTERNATIONAL ECONOMIC PERFORMANCE SINCE THE STOCK MARKET BUBBLE PAGE 5

• European Union. The EU’s real GDP contracted by 0.1 percent during the 

fourth quarter of 2001. 

• Japan. Japan’s real GDP contracted by 2.0 percent from the second quarter of 

2001 to the second quarter of 2002. 

• Canada. Canada’s real GDP contracted by 0.7 percent during the third quarter of 

2001 and again by 0.7 percent during the second quarter of 2003. 

⇒ Industrial production. Since many capital assets are manufactured goods, declining 

investment rates among the major developed economies have disproportionately affected 

their manufacturing sectors. Consequently, the percentage high-to-low decline in 

industrial production was significantly larger than the percentage peak-to-trough decline 

in real GDP in each of the major developed economies. Among the major developed 

economies, Japan had the largest high-to-low contraction in industrial production (see 

Graph 2). 

• United States. U.S. industrial production contracted by 6.7 percent from a high 

during June 2000 to a low during December 2001.

• European Union. The EU’s industrial production contracted by 3.6 percent from 

a high during December 2000 to a low during November 2001. 

• Japan. Japan’s industrial production contracted by 15.7 percent from a high 

during December 2000 to a low during November 2001.Canada. Canada’s 

industrial production contracted by 6.9 percent from a high during December 

2000 to a low during December 2001. 

Graph 2 -Contraction in Industrial Production

(Peak-to-Trough)

-6.7%

-3.6%

-15.7%

-6.9%

-17.0%

-16.0%

-15.0%

-14.0%

-13.0%

-12.0%

-11.0%

-10.0%

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

United States European Union 15 Japan Canada

Economy

Peak-to-Trough Contraction in Industrial Production 

(SA) in %
PAGE 6 A JOINT ECONOMIC COMMITTEE STUDY

⇒ Unemployment Rate. Among the major developed economies, Japan suffered the 

largest increase in its unemployment rate, while Canada and the European Union tied for 

the highest peak unemployment rate (see Graph 3). In 2002, the last year in which 

complete data are available, the average duration of unemployment is much shorter for 

unemployed workers in United States than in either the European Union or Japan (see 

Table 2). 

• United States. The U.S. unemployment rate rose from a low of 3.8 percent in 

April 2000 to a high of 6.4 percent in June 2003.11 In 2002, 65.3 percent of 

unemployed American workers found new jobs within three months, while 18.3 

percent of unemployed American workers remained jobless for six months or 

longer.12

• European Union. The EU’s unemployment rate rose from twin lows of 7.3 

percent in March through May 2001 and again in July 2003 to a high of 8.0 

percent from February 2003 through December 2003. In 2002, only 23.6 percent 

of unemployed European workers found new jobs within three months, while 59.0 

percent of unemployed European workers remained jobless for six months or 

longer.13

• Japan. Japan’s unemployment rate rose steadily from a low of 2.0 percent in 

February 1992 to triple highs of 5.5 percent in August 2002, October 2002, and 

January 2003. In 2002, 33.7 percent of unemployed Japanese workers found new 

jobs within three months, while 49.0 percent of unemployed Japanese workers 

remained jobless for six months or longer.14

• Canada. Canada’s unemployment rate rose from a low of 6.7 percent in June 

2000 to twin highs of 8.0 percent in December 2001 and again in August and 

September 2003. In 2002, 65.1 percent of unemployed Canadian workers found 

new jobs within three months, while 18.7 percent of unemployed Canadian 

workers remained jobless for six months or longer.15

Table 2 – Duration of Unemployment in 200216

< 1 Month > 1 Month & 

< 3 Months 

> 3 Months & < 

6 Months 

> 6 Months & < 

1 Year 

> 1 

Year 

Canada 25.8 % 39.3 % 16.2 % 9.0 % 9.7 % 

European Union 7.2 % 16.4 % 17.5 % 17.6 % 41.4 % 

Japan 14.1 % 19.6 % 17.3 % 18.2 % 30.8 % 

United States 34.5 % 30.8 % 16.3 % 9.8 % 8.5 % 

 

11 U.S. Department of Labor, Bureau of Labor Statistics. 

12 OECD. 

13 OECD. 

14 OECD. 

15 OECD. 

16 OECD. 
INTERNATIONAL ECONOMIC PERFORMANCE SINCE THE STOCK MARKET BUBBLE PAGE 7

IV. RECOVERY AND EXPANSION 

Among the major developed economies, the United States was the first to recover and has 

had the most vigorous expansion after the worldwide, stock market bubble-induced recession 

ended. The United States has also enjoyed the largest decline in its unemployment rate. 

⇒ Real GDP Growth (see Graph 4) 

• United States. Since its trough in the third quarter of 2001 through the fourth 

quarter of 2003, U.S. real GDP has grown 7.8 percent cumulatively. 

• European Union. Since its trough in the fourth quarter of 2001 through the 

fourth quarter of 2003, the EU’s real GDP has grown 2.2 percent cumulatively. 

• Japan. Since its trough in the fourth quarter of 2001 through the fourth quarter of 

2003, Japan’s real GDP has grown 5.9 percent cumulatively. 

• Canada. Since its second trough in the second quarter of 2003 through the fourth 

quarter of 2003, Canada’s real GDP has grown 1.0 percent cumulatively. 

Since the troughs of the most recent business cycle occurred at different times in each of 

these major developed economies, Table 3 provides an alternative fixed-time comparison 

of the average annual GDP growth rates in these economies from 2001 to 2003. In either 

comparison, however, the United States registered the best performance among all major 

developed economies in terms of real GDP growth. 

Graph 3 - Increase in Unemployment Rate

(Trough-to-Peak)

2.6%

0.7%

3.5%

1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

United States European Union 15 Japan Canada

Economy

Peak-to-Trough Increase in Unemployment Rate (SA) in 

Percentage Points
PAGE 8 A JOINT ECONOMIC COMMITTEE STUDY

 

Table 3 - Average Annual GDP Growth Rates in Major Developed Economies: 

2001-2003 

United States European Union 15 Japan Canada

Average Annual GDP Growth Rate 2.3% 1.0% 1.1% 2.1% 

⇒ Industrial Production. After suffering the sharpest decline, Japan has enjoyed the 

largest post-trough increase in industrial production among the major developed 

economies. Canada and the United States have experienced moderate post-trough growth 

in their industrial production, while industrial production in the European Union has 

barely increased from its trough (see Graph 5). 

• United States. Since its low in December 2001 to February 2004, industrial 

production has expanded by 5.0 percent in the United States.

• European Union. Since its low in November 2001 to December 2003, industrial 

production has expanded by 1.6 percent in the European Union.

• Japan. Since its low in November 2001 to January 2004, industrial production 

has expanded by 14.8 percent in Japan. 

• Canada. Since its low in December 2001 to December 2003, industrial 

production has expanded by 6.6 percent in Canada. 

Graph 4 - Real GDP Growth (SA) in Percent

(Cumulative Post-Trough) 

7.8%

2.2%

5.9%

1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

United States European Union 15 Japan Canada

Economy

Cumulative Real GDP Growth (SA) in %
INTERNATIONAL ECONOMIC PERFORMANCE SINCE THE STOCK MARKET BUBBLE PAGE 9

⇒ Unemployment Rate. Unemployment rates have fallen from their post-recession high in 

all of the major developed economies except the European Union (see Graphs 6 and 7). 

The fall in unemployment rates has been slower during this recover than many would 

have hoped because of a significant reduction in the number of manufacturing jobs that 

began during the 1990s in most developed economies.17 

• United States. Since its high in June 2003, the unemployment rate in the United 

States has fallen by 0.8 percentage points to 5.6 percent in February 2004. 

• European Union. The unemployment rate in the European Union remained at its 

peak of 8.0 percent in January 2004.

• Japan. Since its last high in January 2003, the unemployment rate in Japan has 

fallen by 0.5 percentage points to 5.0 percent in January 2004.

• Canada. Since its last high during August and September 2003, the 

unemployment rate in Canada has fallen by 0.6 percentage points to 7.4 percent in 

February 2004. 

 

17 All of these economies have suffered long-term losses in manufacturing jobs. Beginning in January 1990, 

manufacturing employment has declined by 27.8 percent since its peak in Japan, 25.8 percent since its peak in the 

European Union, 20.0 percent since its peak in the United States, and 4.1 percent since its peak in Canada. 

Graph 5 - Expansion in Industrial Production

(Post-Trough)

5.0%

1.6%

14.8%

6.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

United States European Union 15 Japan Canada

Economy

Post-Trough Expansion in Industrial Production (SA) in 

%
PAGE 10 A JOINT ECONOMIC COMMITTEE STUDY

V. EFFECT ON GOVERNMENT BUDGET BALANCES 

Falling income tax collections have caused government budget balances (i.e., surpluses or 

deficits) to deteriorate. After the stock market bubble burst in 2000, economic growth slowed in 

Graph 7 - Decrease in Unemployment Rate in Percentage Points

(Post-Peak)

-0.8%

0.0%

-0.5%

-0.6%

-0.9%

-0.8%

-0.7%

-0.6%

-0.5%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

United States European Union 15 Japan Canada

Economy

Decrease in Unemployment Rate (SA) since Peak in 

Percentage Points

Graph 6 - Unemployment Rate Trend: 2000 - 2004

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

Month

Unemployment Rate (SA) in %

United States European Union 15 Japan Canada
INTERNATIONAL ECONOMIC PERFORMANCE SINCE THE STOCK MARKET BUBBLE PAGE 11

all of the major developed countries (i.e., Canada, France, Germany, Italy, Japan, the United 

Kingdom, and the United States). As a result, corporate profits declined, individual capital gains 

disappeared, and the growth of other sources of income decelerated. The OECD reported that 

general government receipts as a percent of GDP fell significantly from 2000 to 2003 in all 

major developed countries. Most of this reduction was due to lower income tax receipts from 

businesses and households as a percent of GDP. Other types of tax receipts as a percent of GDP 

were largely unchanged. 

From 2000 to 2003, general government outlays as a percent of GDP rose significantly in 

all major developed countries except Canada and Japan. Additional costs for defense and 

homeland security following the terrorist attack of September 11 caused general government 

outlays in the United States to increase by 2.3 percentage points to 35.9 percent of GDP in 2003. 

However, other countries had even larger increases in general government outlays as a percent of 

GDP between 2000 and 2003 than the United States. In Germany, general government outlays 

rose by 3.7 percentage points of GDP, while in the United Kingdom, general government outlays 

soared by 5.8 percentage points of GDP. 

Because of diminished general government income tax receipts and higher general 

government outlays, general government budget balances as a percent of GDP deteriorated 

significantly from 2000 to 2003 in all major developed countries except Japan. As seen in Graph 

7, the largest deterioration in general government budget balances occurred in the United 

Kingdom (6.8 percentage points of GDP) followed closely by the United States (6.3 percentage 

points of GDP) and Germany (5.4 percentage points of GDP). The general government budget 

balances deteriorated by 2.6 percentage points of GDP in France and by 2.0 percentage points of 

GDP in Canada and Italy. Although Japan’s general government budget balance did not 

deteriorate as a percentage of GDP, it remained far higher at -7.4 percent of GDP than any other 

major developed country. 

Tax reductions played at most a minor role in the deterioration of general government 

budget balances from 2000 to 2003. Two of the countries that did not significantly reduce their 

tax burdens – Germany and the United Kingdom – suffered two of the largest deteriorations in 

their government budget balances. Instead, these deteriorations in general government budget 

balances were due to significantly higher general government outlays as a percent of GDP. 

Countries that did enact significant tax reductions to stimulate their economies had 

differing results regarding general government budget balances. Four major developed countries 

enacted and began to implement significant tax reductions between 2000 and 2003. In 2000, 

Canada enacted a five-year phased reduction in federal income taxes. In 2001, the United States 

enacted a ten-year phased reduction in federal income and estate taxes. In 2002, France 

implemented significant income and payroll tax reductions. In 2003, the United States 

accelerated the individual income tax rate reductions enacted in 2001, reduced the tax rates 

applied to dividends and capital gains to 15 percent for most individuals, and increased the 

amount of new investments that firms may expense immediately. In 2003, Italy simplified its 

individual and corporate income taxes, slashing the top marginal rate on both to 33 percent. 
PAGE 12 A JOINT ECONOMIC COMMITTEE STUDY

Both Canada and Italy had a relatively small decline in their general government budget 

balances of 2.0 percentage points of GDP. France had a somewhat larger decline of 2.6 

percentage points of GDP, while the United States had a significantly larger decline of 6.3 

percentage points of GDP. The larger deterioration in the United States compared to Canada, 

France, or Italy is mainly attributable to higher general government outlays as a percent of GDP. 

From 2000 to 2003, general government outlays rose by 2.3 percentage points of GDP in the 

United States while general government outlays increased more slowly in France (1.9 percentage 

points of GDP) and Italy (1.6 percentage points of GDP) and actually fell in Canada (-0.9 

percentage points of GDP). 

VI. CONCLUSION 

A worldwide stock market bubble ignited a rush among firms to invest in capital assets 

not only in the United States, but also in the other major developed economies – the European 

Union, Japan, and Canada. The bursting of bubble revealed massive overinvestment and 

malinvestment that has taken years to liquidate in all major developed economies. The resulting 

collapse in investment rates has caused each of these major economies to suffer at least one 

quarter of zero or negative real GDP growth since 2000. Declining investment rates have 

disproportionately affected the manufacturing sectors in each of the major developed economies, 

causing significant losses of manufacturing output and jobs. 

After the bubble burst, the United States has outperformed, on balance, other major 

developed economies in recent years in terms of real GDP growth, industrial production, and the 

decline in its unemployment rate after its post-recession high. The United States has had the 

largest increase in its real GDP of 7.8 percent after its downturn had ended. Although 

unemployment rates have increased in all major developed economies, the United States has had 

Graph 8 - Culumative Deterioration in General Government Budget Balances as a 

Percent of GDP from 2000 to 2003 in G-7 Countries

-2.0%

-2.6%

-5.4%

-2.0%

0.0%

-6.8%

-6.3%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

Canada France Germany Italy Japan United Kingdom United States

Country

Cumulative Deterioration in General Government Budget 

Balances as a % of GDP from 2000 to 2003 in G-7 Countries
INTERNATIONAL ECONOMIC PERFORMANCE SINCE THE STOCK MARKET BUBBLE PAGE 13

the largest post-recession decrease in its unemployment rate of 0.8 percentage points. The most 

recent U.S. unemployment rate of 5.6 percent is significantly lower than the most recent 

unemployment rates in either Canada or the European Union. The average duration of 

unemployment is much shorter for jobless workers in the United States than in either the 

European Union or Japan. 

In every major developed country, the bursting of the bubble slowed economic growth. 

Withering corporate profits, evaporating capital gains, and decelerating growth in other sources 

of income caused income tax collections to fall as a percent of GDP. Consequently, general 

government budget balances deteriorated as a percent of GDP, whether or not countries tried to 

revive economic growth through tax reductions. Indeed, the size of the deterioration in the 

general government budget balances appears more closely related to higher general government 

outlays rather than lower general government receipts.

Robert P. O'Quinn 

Senior Economist to the Vice Chairman