Technically speaking, governments and the public have mistakenly taken a cyclical or temporary expansion to be an upward shift in potential output and long-term income growth. They thus took insufficient account of the impact of a possible downturn in activity on the public finances and private income.
In simpler terms, this means nothing less than extrapolating the good times almost for ever and accordingly increasing spending and indebtedness. 7  4  See Campa and Gavilán (2006) and Blanchard (2007). BIS Review 23/2009  In our economic models, we often speak about “forward-looking agents”, portraying households, firms and governments as making rational economic calculations with a watchful eye on the future.