“The end of the road”?

In “Supply-side Costs of the Great Recession” Barry Bosworth, of the Brookings Institute writes:

The long drawn-out recovery from the 2008-09 financial crisis is now perceived as largely complete. The unemployment rate, currently at 5.6 percent, is well below the average of the last half-century and is projected to decline below the 5½ percent level that the Congressional Budget Office (CBO) has long characterized as full employment by the end of the year. Capacity utilization of the industrial sector is also close to its pre-crisis average of 80 percent.

However, the improvements in these standard measures of resource utilization are largely the product of reduced supplies of labor and capital rather than increased demand. A dramatically lower rate of labor force participation is now accepted as the new normal and the capital stock is expanding at only half of the pre-crisis rate.

These reductions in factor supplies have led the CBO to lower its estimated level of potential output in 2014 by seven percent since the onset of the recession, and it has cut the projected average annual growth by about ½ of a percentage point, from 3 to 2½ percent, relative to pre-crisis expectations. Thus, the economic losses from the recession seem increasingly permanent and not just a transitory business cycle phenomenon. (full paper pdf).

That certainly was not the inevitable outcome, but follows ‘naturally’ from a monetary policy that ‘drowns’ the economy and keeps it ‘down’. Supply will adjust ‘down’ to the new demand conditions. At that point the ‘adjustment’ will be complete, i.e. the economic losses will be permanent.

One year ago I wrote a post that asked: “WILL BERNANKE´S LEGACY BE HAVING INTRODUCED A “UNIT ROOT” IN US RGDP?”, which showed the chart below.

Bosworth

And wrapped-up:

The ‘break’ view is reflected in the “new normal” that many people talk about.

Will it be the case that in 50 years’ time economics students will be shown the “Bernanke Break”?

It seems that just one year on it´s being ‘confirmed’!

One thought on ““The end of the road”?

  1. All hail Barry Bosworth. But these huge losses of income and output and optimism—it was worth it to shave inflation to below 2%, right?

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