Is Recession Damage Permanent?

Hilary Tuttle


May 1, 2014

The Congressional Budget Office revised an estimate it made in 2007 of potential U.S. GDP in 2017, now projecting it will be 7.3% lower than originally forecast. This downgraded output eliminates $1.5 trillion from U.S. economic performance. The CBO usually assumes the economy will realize its potential within a decade, Bloomberg Businessweek reported. But, while the CBO sees the output gap narrowing, it does not project that the economy will ever reach even the new, lower potential GDP.

"The assumption has always been that the U.S. economy will gain back what was lost in a recession," said Barry Bosworth, economist and senior fellow at the Brookings Institution. "Academics are coming to the realization that this time is different and that those losses appear permanent and cannot be regained."

The CBO's lower potential growth figures indicate to many economists that the recession may have permanently damaged the economy. The report noted, however, that the impact of a housing and financial downturn can last longer than the effects of an ordinary recession. As more people cannot or choose not to work full-time, the United States now has a smaller potential labor force, which, paired with the CBO's new, increased figure for "natural unemployment rate," correlates with smaller possible output.

Hilary Tuttle is managing editor of Risk Management.