Has There Been A Permanent Shock To Potential GDP In The US?

Jim Bullard, the President of the St. Louis Fed, wrote an article that suggested that we may have to lower the level of potential GDP that has been at the root of our growth models for years. Therefore, it does not make sense to use policies designed to cut an output gap that is based upon a higher value of potential GDP. This article, and the comments that follow, are an attempt to understand the mechanism behind Bullard's argument for a permanent reduction in US growth models. Some accept the idea that aggregate demand may be reduced because of the lost wealth in housing. Others suggest the the loss of paper wealth may also have an affect of investment in aggregate supply. Banks have not recognized their full loses and they are limiting lending. Businesses may also anticipate lower demand and limit their investments which reflects their uncertainty of future returns on investment.