Here in the United States, there were always three arrows to “hysteresis”—to the argument that the failure to adopt policies that properly fought the downturn of 2008-2009 in an aggressive manner to restore full employment rapidly did not just temporary but permanent damage to the economy’s productive potential. A long period of very slack demand:
- slowed experimentation with business models, organizations, and technologies and so reduced total factor productivity growth by a poorly known but perhaps very substantial amount.
diminished investment and reduced our productive capital stock relative to a rapid-recovery counterfactual baseline by a well understood and large amount.
caused workers to exit from the labor force with little hope of getting them back—too much time out of the workforce had destroyed their social networks they needed in order to effectively search for jobs.
(1) and (2) dealt mighty and powerful permanent blows to American economic growth. Barring some currently-unanticipated large positive shock, we are never getting back to our pre-2007 growth trend:
But there has, over the past couple of years, been good news about (3).
The prime-age employment-to-population ratio is no longer lower than it has been since the 1980s, before the full coming of the feminist economic revolution to the workplace.
Fears that we would never get any significant fraction of the 5%-points of the prime-age population that lost their jobs in 2008-2009 back into work—fears that were very live and very scary over 2010-2013—appear to have been wrong. The prime-age employment-to-population ratio has been climbing at a rate of 0.6%-points per year since the end of 2013. Labor-side hysteresis has thus turned out to be a much smaller deal than worst-case analyses feared back even as little as three and a half years ago.
Do note, moreover, that this increase in the prime-age employment-to-population ratio has been accomplished with no signs of any inflationary pressure whatsoever. The fact that it has been accomplished leads to harsh judgments on the Federal Reserve and the administration of 2010-2014, which were unwilling to pursue the much more stimulative policies within their control—more and faster quantitative easing,
: “How Conservative macroeconomic policy may be making us persistently poorer… https://mainlymacro.blogspot.com/2017/06/could-austeritys-impact-be-persistent.html
…I was happy to sign a letter from mainly academic economists published in the Observer yesterday, supporting the overall direction of Labour’s macroeconomic policy. I would also have been happy to sign something from the Liberal Democrats, who… have the added advantage of being against Brexit, but no such letter exists…. We desperately need more public investment and more current spending to boost demand, which in turn will allow interest rates to come away from their lower bound…. Nominal interest at their lower bound represent a policy failure…. In the textbook macroeconomic models, this policy mistake can have a large but temporary cost in terms of lost output and lower living standards…. In these basic models a short term lack of demand does not have an impact on supply…. Gustav Horn and colleagues… find that the impact of recent fiscal shocks have been persistent rather than temporary, at least so far…. I do not have to argue that such permanent effects are certain to have occurred. The numbers are so large that all I need is to attach a non-negligible probability to this possibility. Once you do that it means we should avoid austerity at all costs. In 2010 austerity was justified by imagined bond market panics, but no one is suggesting that today. The only way to describe current Conservative policy is pre-Keynesian nonsense, and incredibly harmful nonsense at that. That was why I signed the letter…