Post-GFC growth slump

The chart below shows real GDP for the OECD group of nations, which includes most of the developed world, but doesn't include India, China, Russia or Brazil.  From 1980 to the peak of the cycle in 2007, the long-term growth trend was just under 3% per annum.  Since then it's been nearly one third lower, at 2.1% p.a.. In fact, that's a generous calculation.  That 2.1% is taken from the cyclical low point in 2009, not the cyclical peak in 2007.  From the 2007 peak, the growth rate has nearly halved, to 1.7% per annum.




The covid crash will reduce world GDP  by as much as the GFC did.  And the question is:  will the trend growth rate over the next 10 years fall again?  The GFC was the result of excessive credit growth by poorly regulated banks.   Yet what were the reasons for the slump in the long-term growth trend?  Rising inequality; an obsession with balancing budgets in Europe, come what may; an aging population; loss of confidence in stable growth by people; austerity; falling tax revenues because of cuts to company and high-income personal tax rates?

I fear that when "normal" returns, the pernicious gods of neo-liberalism will again be worshipped.  Governments will try to balance budgets by cutting spending, by slashing welfare, by raising indirect taxes.  They will continue to believe that how much leverage there is in the economy is best left to the "markets", that banks can be trusted to manage their affairs, despite the evidence.  They will continue to put their faith in monetary policy instead of Keynesian  fiscal policy, despite the fact that interest rates are now zero almost everywhere in the OECD, and bond yields are absurdly low or negative in all developed countries.  Interest rates have trended lower with each cycle for 30 years.  How will they cut interest rates below zero?  And how will Central Banks stop the consequent asset price speculation and subsequent ever deeper busts?

It's obvious that neo-liberalism has failed.  But, alas, even though governments have embraced socialism, for now, (how ironic is that?) I suspect the lure of orthodoxy as the world economy recovers will be irresistible.  Which will mean that our trend growth rate will fall again, and it will take another crisis to force a rethink.  After all, it was the Great Depression which led to Keynes's famous work, The General Theory of Employment, Interest and Money, and his prescription that when interest rates are extremely low, the only way to generate growth is for governments to undertake deficit spending.  The US unemployment rate is likely to rise to heights not seen since the Great Depression.  Low unemployment only returned with the deficit spending occasioned by the war.  What will reduce the unemployment rate this time?

I don't know which way things will turn.  Are our politicians, financiers and economists perceptive enough to rethink the dogmas of neo-liberalism?  Or are they too hidebound to change course?   Will the public put up with more austerity stretching out over the next decades?  Or will they start voting for extremist right-wing populist parties which distract them from uncomfortable economic realities by manufacturing "enemies of the people"?

One thing is for sure:  without a change in direction, trend growth will fall again, making all these political shifts all the more stark.