Don’t underestimate the economy’s hidden slack

Economists and policymakers are significantly overestimating the permanent damage inflicted to the economy from the financial crisis and recession. We still think that the economy has the potential to grow strongly over the next few years without generating inflationary pressures. A key implication of this is that the structural deficit in the public finances is not as bad as thought. As this becomes apparent, austerity can be significantly scaled back.