how badly has the US economy been damaged?

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http://www.newyorker.com/online/blogs/johncassidy/2013/11/hysteresis-and-the-us-the-bad-news-and-the-good-news.html



Friday’s employment report, which shows that payrolls rose by two hundred and four thousand jobs in October, indicates that the economy was a bit stronger in the past three months than most people thought. But we won’t know the full impact of the government shutdown and the debt-ceiling crisis for a while yet, and it is fanciful to suggest that one better-than-expected jobs report will persuade the Federal Reserve to change course and start withdrawing some of its monetary stimulus.

Trying to sort the signals from the noise in the jobs report is a tough task in the best of times: the margin of error for the payroll figures is plus or minus ninety thousand jobs. So instead I’ll say a few things about a new research paper by three economists at the Federal Reserve, which is getting a lot of attention because it suggests that the recession and its aftermath have not only done terrible things to the U.S. economy in the immediate sense—high rates of joblessness, tepid gross-domestic-product growth, falling incomes—but also seriously undermined the economy’s capacity for future growth. Gavyn Davies, of the Financial Times, drew attention to the study earlier this week; Reuters published a story about it; and, in today’s New York Times, Paul Krugman devoted an entire Op-Ed to it, which was perfectly justified. It deserves to be discussed widely.

The authors of the paper are David Wilcox, the head of economic research at the Fed, and two of his colleagues, William Wascher and Dave Reifschneider. Although the study uses some sophisticated statistical methods, its basic point is straightforward: in the long term, economic output (G.D.P.) is constrained by the quantity and the quality of economic inputs (labor, capital, and technology). If the growth rate and quality of these inputs decline, the potential growth rate of G.D.P. will fall, too—it’s just a matter of arithmetic.

Since the financial crisis of 2007, the authors argue, that’s precisely what has happened. With hiring rates down, many workers have given up searching for jobs and have dropped out of the labor force. (According to today’s employment report, the labor-force participation rate hit yet another low in October: 62.8 per cent.) With budgets tight, corporations and government departments have cut back on investments in new plants and machinery, computer hardware and software, and research and development. And, with investments in innovation depressed, the rate of over-all productivity growth has slowed down.