Monday, February 18, 2013

The slow recovery is even more man-made than the start of the recession

I have argued before that this past recession is to a large extend policy-maker made. While there did not seem to be any fundamental reason (in the real economy sense) for a contraction, the problems in the financial sector have been talked up and aggravated both in Washington (I, II) and Brussels/Frankfurt. And these self-fulfilling actions of the politicians have made things so bad that we may have ended up with large, permanent shock to the economy.

What does all imply for the ensuing recovery? For the US, Kathryn Dominguez and Matthew Shapiro use policy announcements and news reports to see how they have influenced forecasts of the inevitable recovery. And, surprise, it looks like all this politicking on both sides of the pond has slowed down the US recovery significantly in the US, and by extension in Europe as well I would say. In each of 2010, 2011, ans 2012, initial positive forecasts for the year had to be downgraded. That may be a bias towards optimism by the forecasters, as Reinhard and Rogoff have warned that the recovery will be slow. Or it is the politicians' fault. And we may have had a bad permanent shock.

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