A Productivity Boom-in-Waiting?

BERKELEY – A double-dip recession is one thing, but a lost decade is something far more sinister. In the United States, there is growing concern that the worst recession since the Great Depression has damaged the economy’s capacity to grow.

Indeed, there are good reasons for worrying that the US and other advanced countries will now be consigned to a long period of sub-par growth. Having been burned by the crisis, banks have tightened their lending standards, and will now be subject to more stringent capital and liquidity requirements. As a result, bank credit will be harder to obtain.

A more limited supply of bank credit will mean higher capital costs. Small and medium-sized firms – the most important sources of innovation and employment growth – will feel the effects most acutely.

Governments, for their part, will come out of the crisis more heavily indebted, which implies higher future taxes, less investment, and hence slower rates of growth.