Morning Must-Read: Paul Krugman Thinks About Larry Ball, Austerity, and Hysteresis
Paul Krugman: Austerity and Hysteresis: "If you believe official estimates of potential output...
...the Great Recession and its aftermath have done incredible damage, not just to short-run output and employment, but to long-run prospects.... Advanced country real GDP... grew 18 percent from 2000 to 2007... and... was... expected to keep rising at... the same rate... [but] advanced-country GDP is likely... in 2014... [to be] 10 percent below trend.... [with] estimates of economic slack... only 2.2 percent.... Something like an 8 percent hit to economic potential all across the advanced world, which is huge.
One possibility is that the output gap numbers are wrong.... Another possibility is that it’s just a coincidence that underlying growth slowed at the same time as the crisis. But if you take the numbers seriously... hysteresis... is a very big issue.... Austerity equal to one percent of GDP reduces potential output by around 1 percent. That’s huge--easy enough to make austerity a hugely self-defeating policy, even in purely fiscal terms.... Economic policy has been even more destructive than we thought.
