Matt O’Brien: This is why the economy has fallen and it can’t get up: “The chart… shows how much more pessimistic the Congressional Budget Office (CBO) has become about the economy, revising its estimate of potential economic down in each of the last seven years…. This is scary stuff…. If it’s right, it means that the Great Recession has made us permanently poorer…. 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…. 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…. 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… isn’t an urgent problem….”
