Not hard to do–and nothing against either of those big brains–but I’m confuzzled by this post from Brad.
The question–or at least one of the questions–is a) whether there’s hysteresis in play and b) whether reverse hysteresis can be invoked to repair some of the damage. I’m too rushed to go into explanations of terms etc. right now, but John Fernald–my go-to guy on growth theory and evidence–seems to be arguing that hysteresis cannot legitimately be invoked because the slowdown in potential growth occurred prior to the great recession and the damage many of us, including Brad_1, think it did to supply-side inputs (there’s the hysteresis).
Now, Brad_2 seems to be saying he’s not so sure, and–here’s the confusing part–he quotes John as follows (my bold):
Utilization by any empirical measure is where it was a decade ago. And my informal polling of firms doesn’t suggest a lot of slack within companies—they’ve adjusted to the weakness of demand by reducing headcounts and capacity. So you might be offended by the [sharp, sudden] changes in trend, but they’re in the data [and in the world out there].”
Let’s say John’s informal polling is right/representative. Doesn’t that just mean that with greater demand from C, I, G, or X-M they’d adjust to that too, as in reverse hysteresis? Suppose we could lower the dollar and thus the trade deficit, all else equal, or we borrowed a did a big public investment program. Why wouldn’t that increase demand, employment, wages, incomes, and spiritual enlightenment?
By invoking weakness in demand, is John not implicitly saying the constraint is not wholly on the supply side and that reverse hysteresis is possible?
I await reverse confuzzlement by Brad and/or John.