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11/6/13

US Economy: The Great Recession may have crushed America’s economic potential - by Neil Irwin

The title of a new paper from three economists at the Federal Reserve is bloodless: "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy"
But its conclusions are chilling.

The paper offers a depressing portrait of where the economy stands nearly six years after the onset of recession, and amounts to a damning indictment of U.S. policymakers. Their upshot: The United States's long-term economic potential has been diminished by the fact that policymakers have not done more to put people back to work quickly. Our national economic potential is now a whopping 7 percent below where it was heading at the pre-2007 trajectory, the authors find.

As Dave Reifschneider, William Wascher  and David Wilcox sum up in their abstract, “The recent financial crisis and ensuing recession appear to have put the productive capacity of the economy on a lower and shallower trajectory than the one that seemed to be in place prior to 2007.”

What seems to be happening, they argue, is that people who lost their jobs in the recession have now been out of work for years, leading their skills to atrophy and them to become less attached to the workforce. As those workers’ productive capacity diminishes, so does the total potential of the U.S. economy.

Read more: The Great Recession may have crushed America’s economic potential

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