Is the US economy suffering from hysteresis?

September 25, 2009

That is, has the economy snapped in such a way that it can’t bounce back to its previous form? This might be true in the labor market. Mark Thoma takes a shot at the issue:

The 400,000 number used above assumes that employment will return to its pre-recession levels, but if  structural changes in the economy result in a lower normal level of employment, something many economists believe is a real possibility, then labor markets are even further off than indicated above. Personally, I believe that normal employment post-recession (i.e., after resources have moved out of housing, auto production, and finance and found new homes in other industries) won’t be far away from where it was pre-recession, but during the transition period, the rate of employment will be lower than pre-recession levels.

Me: Just how long will that “transition period” be? I think he is too flippant about the challenges of moving resources out of autos, housing and finance.  Wow, the hopes for clear energy must be awfully high!

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