The New Normal


I touched on this idea a few days ago in the post entitled US GDP Growth, Historical and I would like to come back to that again today.  I was just reading an article over at the www.economist.com entitled Humbler horizons.  As you may have guessed by the title it too dealt with reduced economic potential for America.  The article reasoned based on new studies by both the IMF and OECD that the American economy’s long term potential had been significantly reduced because of the damage done by the economic crisis.  Check out this excerpt from the article below.

“What accounts for this stifling effect? Both the OECD and the IMF argue that crises stunt the three main ingredients of growth: capital, labour and innovation. First, by choking off the supply of credit and throttling sales, crises depress investment and thus productivity. Second, they leave prolonged high unemployment in their wake. Some workers lose their skills, which makes it hard for them to find jobs again. Others simply drop out of the workforce altogether, lowering labour-force participation rates. Third, and more controversially, the papers argue that crises undercut innovation, and the efficiency with which capital and labour are used, by interrupting the supply of capital to high-growth firms or by reducing spending on research and development.

The upshot is a permanent reduction in the path of potential GDP. This does not necessarily mean a permanently lower growth rate: an economy whose trend growth was 2.5% before a crisis should return to that rate, but from a lower starting-point.”

The author’s conclusion in the second paragraph makes sense when he basically says that gdp growth rate will return to normal however our projected gdp will have been much reduced.  Below are some charts from the article that help substantiate this.

The bottom line here is it looks that we will all be a little less well off.  What do you think?

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