The biggest economic horror story is real, according to Fed paper

The slow growth the U.S. economy has experienced since the recent recession is not a fleeting condition, rather it’s the result with a serious demographic problem that is poised to dampen economic growth for years, according to a recent research paper by three Federal Reserve economists.

The economists’ model-based data analysis “suggests that demographic factors offer an explanation for puzzlingly weak business investment in the wake of the Great Recession, which some authors … have instead traced back to persistent uncertainty and limited investment decisions,” Etienne Gagnon, Benjamin Johannsen and David Lopez-Salido write in a working paper dated Oct. 3.

Even more troubling, their findings “further suggest that real GDP growth and real interest rates will remain low in the coming decades, consistent with the U.S. economy having reached a ‘new normal,'” a troubling theory that has also been referred to by the recently re-popularized term “secular stagnation.”

The extent to which demographic or other more fundamental issues have been responsible for the exceedingly slow recovery has been, as the authors imply, a hotly debated topic in economics. On one side are those who saw the slow recovery as a result of recession-specific problems such as a battered banking sector and the crumble in home prices; on the other, those who believe that demographic and perhaps technological changes have created a substantial hurdle for the economy to surmount, from which the credit and housing bubble only distracted us.


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