Many economists accept the concept of “hysteresis,” which sounds like, and is, a disease that occurs when persistent periods of weak demand chip away at what I call the “big two” supply-side variables: labor supply and productivity. The figure below reveals the serious consequences of our latest bout with hysteresis.
In today’s WaPo, I tout the concept of “reverse hysteresis,” without, in respect to my non-OTE readers, calling it that. The idea is simply one of symmetry: if lousy policy can depress the big two, good policy can boost them. It’s a more widely held belief than you might think, besides being common sense, IMHO.