Mainstream economists argued, first, that they had identified the end to capitalism’s severe crises, via the institutional and structural changes that had ushered in the “great moderation.” Then, after witnessing the unexpectedly immoderate crash of 2007-08, mainstream economists assured us that economic growth would quickly be restored.
Well now, more than eight years into the current crisis, it is clear both that the initial downturn was much more protracted than mainstream economists (including central bankers, like Ben Bernanke) had the courage to admit and that the persistent negative effects of that crisis continue to depress actual rates of growth below the earlier trend.
According to a new study by Antonio Fatás and Lawrence H. Summers (pdf), “The global financial crisis has permanently lowered the path of GDP in all advanced economies.” The severity and duration of capitalism’s latest crisis can be seen in the charts above, in the successive downward revisions in economic growth (of both potential and actual growth) for both the United States and Europe that extend far in the future. “In fact,” Fatás and Summers argue,
there is overwhelming evidence, both from the current level of output, seven years after the crisis started, as well as the estimates of potential GDP that this has become a permanent shock. It is by now well accepted that these countries will not regain their pre-trend crisis levels.
This persistent crisis of capitalism, which was ignored by mainstream economists, also challenges the mainstream traditions of explaining business cycles by technology shocks and of separating long-term growth dynamics from short-run business cycles.
What mainstream economics obscures from view is that the pattern of capitalist development leading up to 2007 created the conditions for a much more severe downturn than mainstream economists had been willing to admit, and that the severity of that cyclical downturn undermined the long-term rate of capitalist recovery going forward, which has left mainstream economists without a convincing explanation.
Clearly, the predictions by mainstream economists were wrong. But they continue to ignore the real effects of their mistakes, in both the short and long runs, which are being visited upon the working-classes in the United States and Europe.