A recent paper by Cerra and Saxena, two economists at the Bank for International Settlements, argues that the economic costs of recessions and more serious crises tend to be permanent. According to their analysis, post-recession recovery does not generally return an economy to its pre-recession growth trend, but shifts the trend line down a notch. That is, periods of negative growth are not usually followed by periods of above-trend growth. Poor countries may be poor not because their growth rates during healthy periods are lower, but because they have more and deeper disruptions.
I am not in position to adjudicate, except to notice (1) most economists simply assume that recovery returns an economy to trend, (2) the issue is of enormous importance, and (3) if Cerra and Saxena are right, we need to rewrite the macro textbooks (again).
UPDATE: DeLong endorses the view that short run effects don't last:
Which side am I on? I tell my undergraduates:
At a time horizon of 0-3 years, be a Keynesian: the most important things are the fluctuations in unemployment, in real demand, and in capacity utilization.
At a time horizon of 3-8 years, be a demand-side monetarist: you can assume (provisionally) that fluctuations in employment, real demand, and capacity utilization die out; the most important things are the fluctuations in the composition of real demand (investment vs. consumption vs. government vs. net exports) and in inflation- and deflation-causing nominal demand assuming (provisionally) stable growth of the economy's productive capacity.
At a time horizon of 8 years or greater, be a sane supply-sider: the most important things are the processes of investment in physical, human, and organizational capital that raise the economy's productive capacity
"..the most important things are the processes of investment in physical, human, and organizational capital that raise the economy's productive capacity.
ReplyDeleteMy morning's pondering:
Is there a correlation between the writings of conservative economists and the number of empty (or spin) words used to describe our economic predicament?
What is 'investment'? What is 'productive capacity'?
Is the answer to that a purely numerical one? Is 'productivity' merely the output of strawberries per unit of labour, for instance?
Should we close our eyes to the dangerous use of Methyl Bromide used in thier production. A chemical that depletes the world's ozone layer significantly.
http://www.panna.org/resources/documents/mbUseInCA.dv.html
Is it the increased output of paper-pulp through the a greatly expanded native forest-rape regime and a chemicalised process that poses public health hazards, issues of public safety, the potential for loss of property values, risks other to businesses such as tourism, vineyards, horticulture, farming, fisheries and the service industries to these businesses..."
http://tasmaniantimes.com/index.php?/weblog/article/mill-class-action/
In the short and long run isn't the method by which we define 'investment' everything? Could wise investment eliminate or diminish dangerous business cycles?
De Long's long term, which amounts to using a roughly stable proportion of available productive capacity, only comes into effect if the acting like a Keynesian in the short term is pursued, and pursued effectively.
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