Larry Ball has an important paper documenting, on a consistent basis, a very disturbing point: if you believe official estimates of potential output, the Great Recession and its aftermath have done incredible damage, not just to short-run output and employment, but to long-run prospects.

Here’s my back of the envelope version. If you look at the IMF’s “advanced country” real GDP aggregate, it grew 18 percent from 2000 to 2007 — and back in 2007 it was generally expected to keep rising at more or less the same rate. In fact, advanced-country GDP is likely to be only around 6 percent higher in 2014 than it was in 2007, or 10 percent below trend. Yet official estimates of economic slack are much lower than 10 percent — the IMF’s estimate for 2014 is only 2.2 percent. So the numbers seem to imply that the economic crisis caused something like an 8 percent hit to economic potential all across the advanced world, which is huge.

One possibility is that the output gap numbers are wrong; we’re actually having a very hard time figuring out how much slack there is. Another possibility is that it’s just a coincidence that underlying growth slowed at the same time as the crisis. But if you take the numbers seriously, they do seem to indicate that hysteresis — short-term shocks quasi-permanently hurt the economy’s potential — is a very big issue.

Suppose, in particular, that we look at the correlation between austerity policies and the decline in potential output. In the figure below I plot the IMF’s estimates of the change in structural deficits as a percentage of potential GDP, 2009-2013, against Ball’s estimates of the decline in potential output in 2013 relative to pre-crisis expectations:

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This suggests that austerity equal to one percent of GDP reduces potential output by around 1 percent. That’s huge — easy enough to make austerity a hugely self-defeating policy even in purely fiscal terms.

There are various ways you can try to rationalize away this correlation. But it nonetheless looks as if economic policy has been even more destructive than we thought.