Friday, April 6, 2012

Has the Great Recession Made Us Forever Poorer?

Here's a depressing thought: We might never fully recover from the Great Recession. Growth might never pick up enough to get us back to our pre-Lehman trend. We'll just be worse off, forever.

We're talking about this now because there's recently been a disconnect between jobs and GDP data. Jobs number say the recovery is accelerating. GDP numbers say it's not. (This is somewhat a reversal of the last three years, when jobs were lagging behind GDP.) The most likely answer to this apparent puzzle is that there isn't a puzzle at all. GDP growth will be revised upwards, and the numbers will all make sense. That might already be happening.

But Greg Ip at The Economist proposes a bleak alternative: Perhaps we simply can't grow as fast as we used to. Less growth would be needed to create more jobs -- which almost sounds like a good thing. It's not. It would mean we'd have to work more to be richer. Or, to put a more dispiriting spin on it, we are permanently poorer after the Great Recession. Unfortunately, we have a reason to take this pessimistic scenario seriously: It's happened before.

Sweden and South Korea both suffered through financial crises in the 1990s from which they never completely recovered. The below charts from The Economist compare their long-term pre-crisis growth trends versus what actually happened. It's not a pretty picture. Read more.....

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