Cyclical Misconceptions Driving Policy Errors
Key to the “productivity puzzle” – the downshift in productivity growth following the Great Recession – is the persistence of policies rooted in overly optimistic assumptions about trend growth, and mistaken notions about business cycle dynamics. Indeed, a review of the various factors underlying the productivity growth slump does not support the longstanding consensus assuming that a rebound in productivity is around the corner.
Confused by their inability to distinguish between structural and cyclical forces, policymakers launched Grand Experiments in the wake of the Global Financial Crisis that could do nothing to address a structural problem, and this has left them out of ammunition. In anticipation of a fresh recessionary shock, many are now advocating massive fiscal stimulus.
In light of our investigations, the lesson to be learned from failed policy experiments is that, no matter the proposed policy, it should be subject to a litmus test. Ultimately, only policies that genuinely address the challenges of demographics and productivity have a chance to succeed.
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