The Washington PostDemocracy Dies in Darkness

This is why the economy has fallen and it can’t get up

Source: Vox EU

Remember 2007?

It was a simpler time when Beyoncé topped the charts, Hillary was going to be the next president, and Apple's new phone was the talk of the tech world. Okay, so not much has changed. Well, other than the fact that, since then, the economy has fallen and it can't get up.

You can see what this looks like in the chart above. It shows how much more pessimistic the Congressional Budget Office (CBO) has become about the economy, revising its estimate of potential economic activity down in each of the last seven years. The economy, in other words, has grown so little that the CBO doesn't think it can grow quite as much anymore. Although, of course, GDP has still fallen far short of even these diminished expectations.

This is scary stuff. Much more than a series of descending lines can really convey. If it's right, it means that the Great Recession has made us permanently poorer. That the economy will never get back to its pre-crisis trend. Instead, it will stay stuck in a "new normal" of slow growth that feels like a slump—forever.

But why hasn't this big crash been followed by a big comeback? Well, like everything else in economics, it comes down to two things: supply and demand.

Larry Summers, who put this chart together, points out that the economy has needed lower and lower interest rates just to get enough investment to create jobs for everyone who wants one—until now, when it can't push rates any lower. That means that, absent a bubble or stimulus, there might never be enough demand to keep us out of a quasi-recession, or worse.

Not only that, but this "secular stagnation" could turn deficient demand into deficient supply, too. It's what economists call hysteresis, and the idea is that a long slump can hurt the economy's productive capacity. That's because the long-term unemployed could become unemployable, and too little investment today could create bottlenecks that prevent the economy from growing as much tomorrow.

In other words, the economy can't recover on its own, and if it doesn't soon it might never be able to. We need more inflation, more infrastructure spending, and less tut-tutting about the deficit that, unlike our anemic recovery, isn't an urgent problem. We need to realize that just waiting for catchup growth is the new waiting for Godot—and we can't afford for it to not show up.

Otherwise, it might turn out things will never look as good as they did in 2007. Now that's really frightening.