Chapter 7The “New Normal”: Time to Curb Your Enthusiasm?

I am suspicious of the idea of a new paradigm, to use that word, as an entirely new structure of the economy.

—Paul Volcker

What do we mean by the “new normal”? And how real is it?

While a reading of postwar economic history indicates that economic recoveries eventually pick up speed after recessions (see Figure 7.1), numerous forecasters have projected a different outcome this time around. In the aftermath of the Great Recession, economists and other observers are predicting a steadily below average growth recovery—a disturbing scenario that has become known as the new normal.


Figure 7.1 There Was Unusually Slow U.S. Real GDP Growth in the First Three Years of Recovery from the Great Recession of 2008–2009

*Average during recessions from 1960 to 2001. 1980 was not included as it was an abnormal, short-lived recovery.

Source: Bureau of Economic Analysis.

The new normal coinage is often credited to investment strategists at the Pacific Investment Management Company (PIMCO).1 In 2009, they argued for a significant slowing in trend growth due to “de-levering, de-globalization, and re-regulation.” Since 2010, the term has also become associated with the earlier mentioned Reinhart and Rogoff book on the historical fallout from financial crises, such as the one that triggered the Great Recession.2

If the new normal school ...

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