Why the Economy Might Never Recover

What’s the Latest Development?

American companies are beginning to hire new employees but economic growth is still forecast far below pre-recession rates. In other words, the future may hold more jobs but less economic growth. That may sound alright, but it means that, as a nation, we will have to work harder to be less well off. South Korea and Sweden, countries which suffered financial crises before 2000, have suffered just this fate, as evidenced by extremely long unemployment rates and growth at levels below what economists had predicted pre-crisis. 

What’s the Big Idea?

It may be the case that during economic boom years, predictions of economic growth were exaggerated. But what is more likely, says economics reporter Matthew O’Brien, is that long term unemployment has entered a phase economists call ‘hysteresis’. “The basic idea is that people who are unemployed for too long become unemployable. People lose skills the longer they are out of work, which, insidiously, makes employers less likely to hire them, which makes their loss of skills all the worse.” The result is that the economy settles at a lower point of equilibrium. 

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