Over time, our understanding of the relationship between recessions and supply-side factors has evolved.13 There is a growing body of work suggesting that recessions can leave behind lasting damage – especially severe recessions associated with a financial crisis.
One recent analysis suggests that about one-third of the time, there is no permanent supply-side damage; about one-third of the time, there is a reduction in the level of potential output but not its subsequent growth rate; and about one-third of the time, there is a reduction both in the level of output and in the growth rate.14 Unfortunately, recent experience suggests that the United States is at risk of falling in the last category (figure 7).