Despite some signs of improvement, the U.S. economy remains far from healed. And the longer the slump persists, the nastier the lingering scar that will mar the economy for decades to come. By the best measures of economic health, more than five years after the recession ended the U.S. economy is onlyone-third to half the way to fully recovered. But hidden beyond the immediate tolls of inadequate recovery, notably high unemployment and depressed incomes, lies another grave cost: The economy’s potential health and productivity is atrophying from this prolonged spell of stagnation. Policymakers must act decisively to mitigate this economic scarring, which threatens to unnecessarily reduce future living standards and impede our ability to tackle other looming challenges. Economic output remains depressed more than 4 percent below estimates of its potential—what could be produced if the economy were running at full employment and full utilization of other productive resources, such as factories and capital. And continuing at the average pace of growth over the last year or two, the economy will still be depressed below its estimated potential more than a decade from now. But the longer productive resources remain idle or underutilized, the more their supply will whither and the economy’s potential will be sapped. Channels through which a sickly economy has been eroding our long-term economic health include a diminished labor force, decreased investment and reduced rates of business formation. Most of the recent decline in the unemployment rate has resulted from workers dropping out of the labor force, as opposed to a rising share of the population finding work. Unemployed workers see skills atrophy, and discouraged workers will increasingly exit the labor force permanently the longer jobs remain scarce. While demand for goods and services remains unusually weak, businesses invest less in research and development than they would in a healthy economy, and fewer new businesses are started. Adjusting for inflation and population growth, private business investment hasn’t caught up with pre-recession levels; thanks to austerity, neither has public investment. The number of new business establishments remains well below pre-recession levels, and their share among all businesses has also shrunk. As a result of productive resources being underutilized and investments forgone, estimates of the economy’s potential (such as projections published by the Congressional Budget Office and International Monetary Fund) have been repeatedly lowered since the recession’s onset. So instead of the economy just catching back up with its potential levels of production, economic potential is also shrinking. For instance, research by Federal Reserve economists suggests that U.S. economic output has fallen roughly 10 percent below its pre-recession trend—and they expect less than one-third of this drop will be recovered. Unless reversed, economic scarring permanently lowering output by 7 percent would amount to every American giving up on average more than $4,000 each year. But as economists Laurence Ball, Brad DeLong and Larry Summers argue, there is good reason to believe that much of the decline in potential can be reversed—if policymakers quickly address the root causes of economic scarring. The only real insurance policy to minimize the lasting extent of this scarring are government policies to boost employment and growth, such as increasing infrastructure spending or reinstating emergency unemployment benefits. More jobs would help draw discouraged workers back into the labor force. Public investment in infrastructure or research and development would help compensate for lower private levels of investment. And increasing demand for goods and services would improve prospects for business sales that could only encourage start-ups and entrepreneurship. Moreover, there’s reason to believe that policies to boost recovery will pay for themselves over the long run by undoing harmful economic scarring. The degree to which scars from the Great Recession can be reversed is not fully understood. But the status quo of inadequate recovery is unequivocally deepening those scars. And it is all but guaranteed that the longer productive economic resources are allowed to wastefully lie underutilized, the harder it will be to eventually mitigate the related economic effects. Policymakers owe it to younger Americans and coming generations not to needlessly hobble the economy for decades to come. Andrew Fieldhouse
America's bull markets: buy, buy, buy will go to the moon food stamps, disability, youth unemployment, student debt
Hello dbphoenix: With all do respect Andrew Fieldhouse is delusional as are all these Keyensian economists/Yellen/Geenspan et al., in charge of improving the economy. The printing of money does not create wealth. It only steals wealth and wastes it on government programs that cannot be supported by a free market. To buy goods and services, goods and services must be produced for trade. This is the esssence of a market. Not money printed out of thin air. The ultimate goal of any economy is the efficient use of existing resources to produce the highest standard of living for the participants. If you have some one producing goods or services needed by the market then this person is producing wealth. If you have some one printing money and buying goods and services with that money then this is in word, theft. The ultimate effect is an increase in prices that we call inflation and a reduction in purchasing power of the dollar. This is not an improvement in the economy no matter how the money printed is handed out. It is a distortion of the economy since it encourages malinvestments. This paper "Fiscal Policy and Full Employment" by Laurence Ball et al, referenced by Fieldhouse simply advocates an "increase in government spending". Or as they like to word it "use macroeconomic policy to boost demand." Boosting demand by printing money but with their supposed improved variation. But demand for what exactly ? Is this real demand for things people want and need. I will give them the basic logic of their argument namely that if the government prints enough money to give every unemployed person a $ 100,000/year in return for them working on some government project that we will have full employment. But so what. A child could come up with that solution. And that is what Laurence Ball et al are in essence saying in their paper. Increase government spending to increase demand and create full employment. But is fixing the economy that easy. Or as they say about the government restoring full employment "it is easier than one might think." If it were that easy there would be no poverty any where in the world because we could have prosperity by just printing money. Obviously these guys are clueless. So how do you increase unemployment and raise income ? To start, you need a free market. So number, one get the Federal Reserve/government out of the improve the economy by printing more money business. Their interference distorts the economy by encouraging malinvestments. These malinvestments attract goods and labor from other industries but these artificially stimulated industries cannot be sustained in a free market. Once the printed money has been used up the people who were employed because of this artificial stimulus become unemployed. And the industries that suffered because of these malinvestments were not able to produce the goods and services as efficiently as they would have be able to without the market distortions created by the stimulus. See The Wealth of Nations by Adam Smith and his reference to the invisible hand and how the market adjusts it self to become more efficient. The ultimate flaw in the Keyensian economists logic and we can include the Marxists and socialists here, is the idea that a centrally planned economy is better than a free market economy. People make their demands known by the prices they are willing to pay. Demand created in a free market is real demand and producers use this pricing mechanism to determine what they should be producing and how much. Demand created by a government stimulus can only distort an economy. Some economics 101. “All markets are created by people who disagree on value but agree on price.” “The value of any thing can range from priceless to nothing in the mind of the owner. But its price can only be determined by what some one else is willing to pay for it. When the government artificially creates demand by printing money eg Quantitative Easing it distorts this pricing mechanism. Once an injection of money has run its course the market seeks equilibrium, meaning that the market will try and reestablish the relative value of goods and services based on real supply and demand.” The below article explains the beauty of the free market so very well while comparing it to the flawed ideas of socialism: What Is the Free Market ? by Murray N. Rothbard http://www.lewrockwell.com/rothbard/rothbard106.html The below pdf book is the best explanation of money and the business cycle that I know of. Money is never explored in depth by most economists, except to say it is a medium of exchange. Rothbard describes what money really is and how government and central bank (Federal Reserve System) meddling has turned it in to inflationary fiat money. All of this meddling exaggerates business cycles. This is explained very well in this book. The 2008 financial crisis, our currenteconomic crisis, the euro zone crisis were all caused by government and central bank manipulations of money: What Has the Government Done With Our Money by Murray Rothbard http://mises.org/books/whathasgovernmentdone.pdf Hazlitt’s pdf book does what the title says: Economics in One Lesson By HENRY HAZLITT http://www.fee.org/library/books/economics-in-one-lesson/ The school of economics that I consider to be the most correct is the Austrian school of economics. This web site will explain the origins and reasoning behind this school of economics. See their FAQ: www.mises.org In this book Hayek warns against the dangers of increasing government control of the economy. The Road to Serfdom by Friedrich A Hayek who won the Nobel Prize for economics. Anubis