World economy Nations do not just pick up where they left off after big downturns. Accumulated damage drags on labour and financial markets.
The United States economy reached a significant milestone in May when the number of employed Americans returned to the peak recorded before the advent of the global financial crisis.
But May's milestone was not an occasion to celebrate. What was more important than the number in work was the obverse – the number out of work.
Since the financial crisis began back in 2008, the US population has increased by 15 million. To restore the ratio of employed to the total eligible to its pre-crisis level would require another 6.9 million jobs to be created and filled.
Even then the national workforce would be inferior to the pre-crisis condition in that most of the new jobs would be in the low-paying service sectors. Their contribution to consumer demand would be significantly less had the composition of employment returned to its pre-crisis structure.
For investment to return to its pre-crisis trend line would require the US to successfully push its way into export markets. The problem there is that there are 20 or so other developed economies with the same challenging economic fundamentals as the US.
Most of the developed economies – Australia being one of the few exceptions – are exhibiting worrisome symptoms of "hysteresis".
Hysteresis refers to the dependence of the output of a system not only on current input, but also on its history of past inputs.Participation slumps
In the US labour example, the degree of participation in the workforce has fallen significantly since the advent of the global financial crisis. The GFC is not the only factor that has changed the attitude of so many Americans disengaging from the labour market, but it is the most obvious.
Other factors could include automation, globalisation or simply ageing. The depth and duration of the Great Recession (as it is referred to in the northern hemisphere) – along with deployment of austerity as a fiscal strategy and near zero official interest rates – have characterised the GFC as being qualitatively different from the mainly cyclical recessions of the post-World War II era.
Studies of deep depressions in earlier times have identified the highly persistent effects of hysteresis-influenced inputs on long-term output.Hysteresis confirmed.
And as Lawrence Summers, an economist of academic distinction who has had practical policy experience at the highest level, remarked back in April: "The financial crisis has confirmed the doctrine of hysteresis more
strongly than anyone might have supposed."
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