The Economist’s Free Exchange blog recently discussed some of the puzzles of the contemporary American economy. They include:

• GDP is growing slower than economists expect.
• The existing rates of GDP growth should lead to around a 2.5% decrease in unemployment. Yet unemployment has actually decreased by 5.1%.
• Inflation is higher than it should be.

Free Exchanges goes onto note that one explanation that would be consistent with all of these statistics would be a permanent long-term reduction in American potential output. While the author is uncomfortable with this explanation because it suggests that Americans woke up one day to “find their left arms had fallen off” the explanation has the advantage of simplicity.

To read other explanations for the phenomena, Japan’s experience, and why the failure to deliver more monetary and fiscal stimulus might have been more tragic than we realized, click here.

Source: The Economist