Will the U.S. recover lost output and jobs?

At the last meeting of the American Economic Association in Denver, Giuseppe Fontana discussed the theoretical arguments on whether the Great Recession will generate a permanent loss in output. He argued that, according to the dominant “New Consensus” theory, output should return to its historical path once the shock has been absorbed. Alternative, heterodox theories, suggest that the shock will have permanent effects.

In the chart we plot U.S. real GDP along with its trend, estimated using a simple exponential function over the pre-recession period (from 1970 to 2007). The average growth rate in output over this period was slightly above 3 percent. The dotted red line plots the evolution of GDP, should it resume its average, pre-recession, growth rate. The red line therefore represents the idea that the recession will have permanent effects. The green dashed line has been drawn under the assumption that the economy gets back to its pre-recession growth path by the end of 2015.

Real GDP needs to grow at 5.2 percent from now to 2015, to achieve this result…