Also over at Alt-M is my colleague Larry White’s careful assessment of the Great Recession and monetary policy. Although Larry’s assessment is a bit wonky, it’s well worth reading. Here’s his conclusion:
I suggest that real GDP has shifted to a lower path because of a shrinkage in the economy’s productive capital stock — a problem that better monetary policy (not feeding the boom) could have helped to avoid, but cannot now fix. During the housing boom, investible resources that could have gone into augmenting human capital, building useful machines and sustainable enterprises, and conducting commercial research and development, were instead diverted to housing construction. In the crisis it became evident that the housing built was not worth the opportunity cost of the resources allocated to it. That major misallocation of resources has lowered the path of the capital stock below its previous trend. I do not know precisely how the contribution of capital input is measured when the CBO estimates potential output, but I hypothesize that potential output is currently overestimated because capital wastage has not been fully recognized.