by Jim Rose in global financial crisis (GFC), great recession

Robert Lucas in this speech noted that the implicit assumption is that the US economy will get back to old trend growth rate and the only question is how long it will take

Lucas asked whether this is really the case? He noted that:

We know that European economies have larger government role and 20-30% lower income level than the US; and

Is it possible that by imitating European policies on labor markets, welfare, and taxes U.S. has chosen a new, lower GDP trend?

If so, Lucas said that it may be that the weak recovery the USA has had so far is all the recovery it will get.

Ed Prescott also considers that tax rates are being increased in the USA. These increases lower amount of capital a firm chooses to have. The reason for low investment is not problem of getting loans – it is expected future high tax rates in the USA.

Ed Prescott also considers that investment suddenly became depressed beginning early in 2008 – because of a policy regime change. Business owners feared higher tax rates with the regime change and rationally cut investment, rationally cut employment ad rationally took more cash out of business.