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Business and Labor

Counteracting “Hysteresis”

Real GDP, 1929-69

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(Analysis) Good observations and discussion about analysis showing estimates of lost potential in the US economy is ongoing. The analysis [pdf] suggests that through disuse, US factors of production are deteriorating, causing a longer period of time when the total value of goods and services capable of being produced in the US economy is reduced. This is technically referred to by economists as “hysteresis”, and results from a negative feedback loop when capital and labor are underutilized. Previous content by WNY-WJ about this analysis can be found here.

The cure to hysteresis is a sustained period of time when factors of production are “over-utilized” – in other words, a sustained economic boom. This will cause investment into both capital and labor, serving to replenish their productive capabilities. It is what happened during WWII, causing the previous years of depression to be erased.

A look at the graph shows that a sustained period of above-trend economic performance, measured by real GDP during years of increased federal spending due to the war (indicated by the red line in the yellow shaded area), resulted in a return to trend-level (indicated by the blue line) performance after the war. Such a sustained period of above-trend economic performance is now necessary in order to restore the US economy to its pre-recessionary path. The past suggests that either government or the private sector can deliver investment necessary to generate a required economic boom.



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