says the devastating recession and its after-effects have reduced the potential growth rate some amount; he isn’t specific as to how much.And why is the potential growth rate for the economy important?
Before the Great Recession of 2007-2009, the U.S. economy was capable of growing at 2.5% a year at full employment without generating inflation. That’s what economists call “the potential growth rate.” It’s basically the rate of growth in the labor force plus the rate of growth in output per hour, or productivity.
To the Fed, it’s the speed limit for growth once the economy returns, as it expects will happen a few years from now, to full employment.And why has the potential growth rate declined?
Mr. Bernanke provides several reasons including
(4) The drop in business investment during the recession may retard future growth in productivity. (The more investment, the more likely output per hour of work is likely to rise.)
(5) The shock of the worst recession since the Great Depression, with all the losses in real estate and stocks plus the distressingly slow recovery, may have reduced the willingness of investors and businesses to take risks, particularly the risk of starting a new business or applying new technologies.And then he adds a couple of other reasons
But Mr. Bernanke, as he has repeatedly in the past, emphasized that today’s lousy economy reflects a lot more than this slowing in the U.S. economy’s long-run potential growth rate.
For now, the U.S. economy is fighting substantial “headwinds” — housing, credit conditions that aren’t yet back to normal, Europe’s sovereign debt and banking mess and the “drag” from federal budget tightening — that are restraining economic growth and preventing the unemployment rate from falling faster.In short, Mr. Bernanke has discovered that pursuing the Japanese Model for handling a bank solvency led financial crisis leads to a Japan-style economic slump.
End the policies that support the Japanese Model and end the economic slump.
Regular readers know that the economic slump and the various "headwinds" Mr. Bernanke lists are all addressed by implementing the Swedish Model and requiring the banks to recognize the losses on the excess debt in the financial system.
With losses recognized, families can stay in their houses and the housing market returns to functioning.
With losses recognized, credit conditions can return to normal as there is no need to pursue zero interest rate and quantitative easing policies.
With losses recognized, Europe's sovereign debt problem is addressed as the losses on this debt are included in the losses banks recognize.
With losses recognized, there is no need for federal budget tightening as the economy begins to grow again and generate additional tax revenue. At the same time, the need for economic stabilizer programs is reduced as more people are working.