PRINCETON – From the start, policy responses to the 2008 financial crisis were colored by memories and interpretations of the Great Depression. The conventional wisdom now holds that the world avoided a repeat of the interwar catastrophe, largely because policymakers made better decisions this time around. But, while there is plenty of room for self-congratulation, two features of the post-crisis recovery cast a shadow over the celebrations.
First, despite unprecedented monetary expansion and massive fiscal stimulus, recovery has been strikingly weak and fragile. In the eurozone, the debt crisis triggered a sharp turn to fiscal contraction – and, with it, a return to recession. But, even in the United States, where there was plenty of initial stimulus, the long-term growth rate seems likely to remain well below pre-crisis levels for the foreseeable future.
The faltering upswing recalls the 1930’s, when many prominent economists, including John Maynard Keynes and his leading American exponent, Alvin Hansen, decided that the world was entering a phase of secular stagnation. In their view, the Industrial Revolution’s vigor and dynamism had been exhausted, with nothing to replace it to sustain economic growth.
The second caveat about the post-crisis world is even more alarming. Many countries responded to the Great Depression by adopting policies aimed at reducing disparities in wealth and income. As a result, by the middle of the twentieth century, the extreme social and economic inequality that had characterized industrialized countries seemed to be disappearing.