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Friday, April 01, 2011

DeLong: The Anatomy of Slow Recovery

Why is this recovery so slow?:

The Anatomy of Slow Recovery, by J. Bradford DeLong, Project Syndicate: ...[T]he decidedly sub-par pace of today’s jobless recovery in the US ... is not out of line with other American yardsticks: since the output trough, real GDP has grown at an average rate of 2.86%/year, barely above the rate of growth of the US economy’s productive potential. ...
The obvious hypothesis to explain why the current US recovery – like the previous two – has proceeded at a sub-par pace is that the speed of any recovery is linked to what caused the downturn. A pre-1990 recession was triggered by a Fed decision to switch policy ... to inflation-fighting. ... As soon as the Fed had achieved its inflation-fighting goal, however, it would end the liquidity squeeze. ... From an entrepreneurial standpoint,... recovery was a straightforward matter: simply pick up where you left off and do what you used to do.
After the most recent US downturn, however (and to a lesser extent after its two predecessors), things have been different. The downturn was not caused by a liquidity squeeze, so the Fed cannot wave its wand and return ... to the... pre-recession configuration. And that means that the entrepreneurial problems of are much more complex...: as long as aggregate demand remains low... investments, lines of business, and worker-firm matches that would be highly productive and profitable at normal levels of capacity utilization and unemployment are unprofitable now.
So, what America needs now is not just a recovery in demand, but also structural adjustment. Unfortunately, the market cannot produce a demand recovery rapidly by itself. And it cannot produce structural adjustment at all until a demand recovery is well under way.

    Posted by on Friday, April 1, 2011 at 12:24 AM in Economics | Permalink  Comments (15)


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