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Why We Think the Economy Should be Doing Better

Posted on August 26, 2013

Why do we find it so hard to believe, after more than four years of economic growth, that a real recovery is here?  A big part of the answer is highlighted in a chart offered by J. Bradford DeLong, Professor of Economics at Berkeley:


What the chart shows is that coming out of the recession U.S. gross domestic product resumed its previous rate of growth, but has never resumed its previous growth path ” as it did after past downturns (though belatedly in the case of the Great Depression).  This leaves a gap of some 5.5 percent between where GDP actually is and where it would (or should) be on the established path. The persistence of the gap and the cumulative loss of output, more than the initial depth of the trough, is emerging as the most serious aspect of the Great Recession.

DeLong, a respected economist of centrist bent, sees no reason to believe “that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.” For him, the chart indicts policy positions of congressional Republicans, the Obama administration, and the Federal Reserve Board. For me, it presents at least a partial explanation of a recurring issue in AIM’s monthly Business Confidence Index: the reluctance of Massachusetts employers, over the past four years, to offer strongly positive assessments of current and prospective business conditions ” even when the economy is growing strongly.

We can talk about a “new normal” of slower growth, and adjust our business plans and our investment portfolios accordingly; but perhaps on some level of sentiment we have not lowered our expectations in the same way. Even when the economy is going pretty well, we think it should be doing better. And we may be right.