Spring-boarding off a recent paper (pdf), Ryan Avent sizes up the Great Recession:
[T]he rich world is setting itself up to suffer through future events like the crisis of the last few years. Because there has been no urgency about moving back to full economic capacity, both interest rates and inflation rates remain at rock-bottom levels across much of the rich world. That means that there is very little cushion in the system against future shocks.
If big trouble strikes central banks will once again struggle to find the will to boost activity, and economies will once again move sideways for long periods of time. Fiscal policy is unlikely to come to the rescue, since the economic morass of the past six years seems to have made the public less tolerant of bold fiscal stimulus and certainly hasn’t done anything for sovereign debt loads.
The most pernicious aspect of this dynamic is its pace. If we woke up tomorrow to find the German economy brought to a screeching halt, we would rush to action, to restore activity there and prevent damage elsewhere. But because this disaster is playing out a bit at a time, such that our expectations slowly adjust, we tolerate it.
Weissmann chimes in:
Typically, we expect economies to fully heal after a recession. But if a downturn is powerful enough, and its effects are allowed to linger long enough, the thinking goes, a country can end up permanently scarred. The unemployed drift from the workforce for good. Companies cut back on investing in new tools or research, which makes them less productive and innovative in the future. Ultimately, the economy’s potential—its size if everything were functioning normally, judged by fundamentals like labor availability and capital stock—simply shrinks. Hysteresis sets in.
And Americans aren’t the only ones supposedly suffering. Most of the developed world appears to be infected, too.
The Dish 