- 2021-06-05
In the shadow of the Great Recession
The United States and Europe are still living in the shadow of the 2007-2009 financial crisis and the subsequent Eurozone crisis. Would better policies have avoided this result; if so, what policies would it be?
The recovery is ongoing, but to a limited extent. Changes in the gross domestic product (GDP) of countries affected by the crisis are now almost universally positive. But GDP is still far below the level predicted based on pre-crisis trends. In most cases, growth has not yet resumed as before, mainly because of the decline in productivity growth. In the Eurozone, GDP in the second quarter of 2015 was still below its pre-crisis level. In the euro zone members affected by the crisis, it is still far away to return to the pre-crisis output levels. They will suffer "lost decades".
Starting from a sample of 23 high-income countries, Johns Hopkins University professor Laurence Ball concluded that the potential output loss varies from zero in Switzerland to Greece and Hungary. And Ireland’s over 30%. He concluded that overall, the potential output in 2015 will be 8.4% lower than predicted based on pre-crisis trends. He pointed out that the devastation caused by the Great Recession is roughly equivalent to the loss of the entire German economy.
Professor Bauer and recent studies by Antonio Fatas of Insead and Lawrence Summers of Harvard University (Harvard) The main conclusion is that the potential output Valuation is following actual output. This shows that hysteresis—the influence of past experience on later performance—is very large. Possible reasons for the lag effect include: the impact of long-term unemployment on employability; investment slowdown; the financial industry’s ability to support innovation has declined; and the general loss of animal spirits.
In 2015, Jason Furman, chairman of the US Council of Economic Advisers, proposed the impact of low investment levels after the crisis: after the crisis, the contribution of investment to labor productivity fell to a very low level. Low level. This is obvious in the United States. In fact, the estimated value of its investment contribution to labor productivity is negative.
The hysteresis hypothesis has not been unanimously accepted. There are at least three other explanations for the long-term decline in output after the crisis.
First, it has been argued that the credit boom has made pre-crisis valuations of potential output much higher than sustainable levels. A rebuttal to this view is that the effect of credit expansion on asset prices far exceeds the effect on actual expenditures. Adair Turner, the former chairman of the UK Financial Services Authority (FSA), clarified this in his book "Between Debt and the Devil." A further rebuttal to this view is that it confuses the contribution of debt to the structure of demand and its impact on overall supply.
The second explanation for the output decline after the crisis is that the impact of new technologies on output has been underestimated. However, even if it does (it is possible), it cannot explain why productivity growth has fallen sharply after the financial crisis. The difficulty of measuring the impact of new technologies in the UK has not risen suddenly compared to the US. The United Kingdom is the country where productivity growth has been most severely affected by the economic slowdown after the crisis, while the United States is the birthplace of these new technologies, and the productivity slowdown is relatively minor.
The last explanation is that productivity growth slowed before the financial crisis. In the United States, this seems to be the case. But other areas are not so obvious.
In general, the hysteresis hypothesis is very powerful. This is why it is so important to avoid large-scale crises and respond forcefully to any crises in order to minimize the economic impact. Otherwise, this vicious circle may cause permanent damage to the trend.
This further raises two questions: Could the negative effects of this crisis have been smaller? Can the crisis be reversed? The answer to the first question must be yes. But this requires a stronger fiscal and monetary response, as well as a larger-scale reorganization of damaged financial institutions. In particular, the Eurozone should have done better. However, even now, the Eurozone lacks this willingness and the required mechanisms.
As for the question of whether the decline in output levels and the declining growth rate can be reversed, the answer must be yes. In the early 1960s, the per capita GDP of the United States returned to the level that it should have been to continue the trend before 1929. Regrettably, the fiscal stimulus triggered by World War II served as the policy savior at the time. It cannot be replicated in peaceful times. Even so, it is at least possible to return to the pre-crisis growth trend. Strong support for demand coupled with investment in long-term supply (especially through increased public investment) will achieve both goals at the same time.
There is also evidence that intensified recessions have long-term effects on prosperity. One conclusion is that it is vital to take quick steps to restore demand. In addition, the evidence now clearly shows that high-income countries have the policy space to take decisive action. No matter what stupid things many people said in 2010, they never faced the danger of becoming Greece. The United States and even the Eurozone should have responded more boldly.
The European and American recession has nothing to do with China
China may be said to be the beneficiary of the European and American recession, but it is obviously not the manufacturer, just as the United States was the beneficiary of the two world wars, but it was not the same. The European and American recession is endogenous and institutional. of. If the inclusive system is the reason for the country’s success and prosperity, and the absorptive system is the reason for the country’s failure and decline, then the same applies to the analysis of why the current Western countries are stagnating and declining. The reason why the inclusive system is the country’s success is that it provides a relaxed environment and effective incentives for economic growth, while the absorptive system is often due to excessive taxes, excessive wages and social benefits, resulting in capital investment unprofitable. As a result, investment has shrunk, growth has stagnated, and society and the country have declined. Historically, the West is undoubtedly a model of success in the past 200 years, and this success is due to the establishment of an inclusive system. However, when democracy has passed, rationality has been abused, when people indulge in indulgence, when the one-person-one-vote democratic election system has become a welfare auction, then this inclusive system has also become Absorptive system, who will invest at this time, and who still has the motivation to innovate?