The Crown Capital management International Relations Issues : The Great Recession

1
The Great Recession may have crushed Americas
economic potential

• https//plus.google.com/b/103588381206498849384/10
  3588381206498849384/posts
• http//www.linkedin.com/groups/Crown-Management-47
  82511

2

• The title of a new paper from three economists at
  the Federal Reserve is bloodless Aggregate
  Supply in the United States Recent Developments
  and Implications for the Conduct of Monetary
  Policy But its conclusions are chilling.
• The paper offers a depressing portrait of where
  the economy stands nearly six years after the
  onset of recession, and amounts to a damning
  indictment of U.S. policymakers. Their upshot
  The United States's long-term economic potential
  has been diminished by the fact that policymakers
  have not done more to put people back to work
  quickly. Our national economic potential is now a
  whopping 7 percent below where it was heading at
  the pre-2007 trajectory, the authors find.
• As Dave Reifschneider, William Wascher  and David
  Wilcox sum up in their abstract, The recent
  financial crisis and ensuing recession appear to
  have put the productive capacity of the economy
  on a lower and shallower trajectory than the one
  that seemed to be in place prior to 2007.
• What seems to be happening, they argue, is that
  people who lost their jobs in the recession have
  now been out of work for years, leading their
  skills to atrophy and them to become less
  attached to the workforce. As those workers
  productive capacity diminishes, so does the total
  potential of the U.S. economy.

3

• The authors argue that while the natural rate
  of unemployment the proportion of joblessness
  in a fully healthy economy has likely risen due
  to the recession, that effect should be
  dissipating. We see the evidence of recent years
  as suggesting that the natural rate of
  unemployment may have moved up between ½ and 1½
  percentage points since the onset of the recent
  recession, they write.  However, the evidence
  also suggests that the factors leading to this
  increase have begun to reverse and that further
  increases in aggregate demand might therefore
  bring about further healing in the labor market.
• But beyond analyzing the economic situation in
  which the United States finds itself, the Fed
  staffers make an important argument worth
  considering for policymakers here and around the
  world.
• There is a tendency to think of a nations
  aggregate supply, or potential output, as
  something that exists outside the realm of
  influence by short-term economic policy. The
  economic potential, after all, comes from the
  education of its people, the richness of its
  land, the quality of its machines all things
  that a central banker cant do much of anything
  to influence.

4

• In other words, supply is exogenous to a
  policymakers economic model. But that may turn
  on its head in circumstances like the present.
  They write
• The implications for monetary policy may differ
  sharply from what is commonly presumed because
  much of the supply-side damage could be an
  endogenous response to weak aggregate demand. If
  so, then an activist monetary policy may be able
  to limit the amount of supply-side damage that
  occurs initially, and potentially may also help
  to reverse at a later stage such damage as does
  occur. By themselves, such considerations
  militate toward a more aggressive stance of
  policy and help to buttress the case for a highly
  aggressive policy response to a financial crisis
  and associated recession.
• In other words, when there is weak demand and
  people remain out of work, the cyclical downturn
  can become a structural downturn. That means that
  policymakers should move particularly
  aggressively to keep that from happening.
• Its not a new argument the activist wing within
  the Federal Reserve has been making this argument
  for years now, pulling their hair out trying to
  urge their own colleagues and fiscal policymakers
  in Congress to do more to try to avert a loss of
  Americas long-term economic potential. But
  expect this new paper to help their case.