Martin Sandbu: The US’s Lost Decade: "The wasted economic output thus begins to approach 50 per cent of annual GDP. And this is still conservative. It does not consider that even faster demand growth might have been met by increased hours worked. Nor does it consider that overall or 'total factor' productivity (above that gained from simply having more capital) could have responded positively to a 'high-pressure economy'...
...as businesses try to produce more efficiently to satisfy demand or cope with wage rises. Either possibility would increase further the estimated current output level and the wasted output over the decade — and possibly even the ongoing rate of growth from here. It is instructive, then, that my lowest estimates coincide with the highest estimates collected by Furman from his economist luminaries.... These are quite enormous differences—they imply, as Furman concluded, “vastly different mental models”. Who is right matters, most importantly, for what the right policy is in a deep recession, and less importantly, for how much leading economic policymakers should be blamed for the job they did during and after the last one. I find it striking that on the models cited by Furman, policymakers come out looking mostly blameless...
#shouldread #hysteresis #greatrecession #monetarypolicy
