By the End of This Year, the Great Recession Will Have Cost Us $3 Trillion (and It Will Have Cost the Rest of the World $5 Trillion)
Menzie Chinn writes:
Econbrowser: Cumulative Output Loss: In our forthcoming book, Jeffry Frieden and I tried to tabulate the likely costs of lost output associated with the Great Recession.... I decided to update the calculation.... Fears of overheating, when counterbalanced against the costs of lost output, seem somewhat misplaced in this context....
One last point: it is inappropriate to take the trajectory of potential GDP as being unrelated to demand conditions, especially for persistent deviations from full employment, such as those we have seen in the last two and a half years. Consider that depressed investment, largely due to deficient and uncertain demand (rather than regulatory uncertainty), will eventually lead to a substantially smaller capital stock. Indeed, the argument that substantial long term unemployment will lead to elevated structural unemployment is inconsistent with the view that potential is unaffected by the size of the output gap. That means that the cumulative output loss relative to a counterfactual where output was higher is probably greater (although the extent is hard to determine).
As I am tired of saying, a good macro policy would be one that got nominal spending back to its pre-2008 trend growth path as fast as possible. A good SOTU address would propose policies to do so--and announce that those parts of the policy package that can be carried out by the Treasury are being implemented, and demand that the Federal Reserve and the Congress take immediate steps to implement the rest.
