Recession's Lasting Effects: [A] paper presented Friday at the Brookings Institution warns that recessions may do lasting harm, like an untended house that not only needs a good dusting, but has also started to rot…. The fact of reduced investment is clear, as shown in the graph below. The question is whether a rebound in investment eventually will fill the gap, as happened in the United States after the Great Depression, or whether losses will be permanent, as happened in Europe in the 1980s and Japan in the 1990s…. There also may be an effect on employment: Workers may become less employable the longer they remain outside the work force, creating a long-term reduction in the supply of available labor. Mr. Summers was the co-author of a famous paper in the 1980s arguing that just such an effect was dragging on Europe, but the mechanism he proposed – that unions lost interest in their former workers – does not apply in the United States, where unions play a smaller role….
The United States rebounded completely from the Great Depression. Europe and Japan have not rebounded from their more recent traumas. And we are now living through what may be just the fourth comparable experience. The proper antidote to hysteresis, the authors write, is an increase in government spending…. [T]here is little prospect that Congressional Republicans will revisit their opposition to stimulus this year. Which means that our current experiment will run to completion: If hysteresis is real, we will know it by its consequences.