First, some background.
In early 2009, I and colleagues at the investment management firm Pimco developed the concept of the “new normal.” It was shorthand for a simple yet consequential hypothesis: That coming out of the financial crisis, the economy would not recover in a normal cyclical fashion. Instead, we wrote in a May 2009 paper, “growth will be subdued for a while and unemployment high; a heavy hand of government will be evident in several sectors; the core of the global system will be less cohesive and, with the magnet of the Anglo-Saxon model in retreat, finance will no longer be accorded a preeminent role in post-industrial economies.”
The new normal was not just a prediction that in the absence of fundamental policy adjustments the West would face an unusually sluggish recovery process, with the accompanying — and mounting — political and social costs. The concept included consideration of an accelerated convergence of income and wealth between the established Western economies that would struggle and the more dynamic and resilient emerging countries such as Brazil and China. With that, we argued, the system of global governance would join its national and regional counterparts in being operationally challenged, as well as having its legitimacy questioned and its credibility undermined.
Solid analytical backing for this framework followed in economics books, including by academics Carmen Reinhart and Ken Rogoff, who explained the peculiar dynamics of recovery from severe debt crises, and by Mike Spence, a Nobel laureate in economics who described the underpinning of the growth process.
Initially, the concept was controversial. Many rushed to dismiss it as overly pessimistic for ignoring historically robust drivers of cyclical rebounds. Others called the concept too fatalistic, saying that it would be overwhelmed by unusual policy activism that included large government stimulus packages as well as “unconventional measures” by central banks combining exceptionally low interest rates with direct purchases of government securities.
Unfortunately, both criticisms proved misleading.
I say unfortunately because the new normal that asserted itself has involved significant human suffering. Unusually high unemployment has persisted, particularly among youths, along with a surge in those classified as long-term unemployed and those who completely dropped out of the labor force.
It is unfortunate also because the main public policy insight of the hypothesis — a call for policymakers’ action to be more agile, strategic, secular and comprehensive — came to too little. Instead, economic disappointments fueled political polarization that has, in turn, aggravated the economic malaise and made the challenges of the new normal even more daunting.