A lot of economy watchers understandably obsess over whether there’s a double dip lurking out there somewhere, asking whether real GDP will soon begin to contract again. But I obsess about something different, and I’d argue more important: whether GDP is below potential.
Crossing zero—growing vs. shrinking—is obviously a big deal, and it’s easy for folks to wrap their heads around: economy growing=good; economy shrinking=bad.
But many economists define “bad” as not shrinking but growing too slowly. And “too slowly” in GDP-terms means below potential. GDP’s potential growth rate is the sum of the underlying trends in productivity growth plus labor force growth, which according to the Congressional Budget Office, amounts to 2.4% these days.
(Want some simple algebra? If Y is output and L is labor, then Y=Y/L*L…take natural logs and differences, so you’ve got growth rates, and you get the potential growth summation just noted.)
If we’re growing below potential, we’re not creating enough jobs to absorb new folks coming into the job market and most importantly of late, to re-employ the un- and underemployed.
And we are already growing below potential. The figure shows actual growth rates of GDP since the recession began plotted against the 2.4% potential. We were above potential for a couple of quarters, but we’re below it now. That’s why unemployment’s been stuck at such high levels.
Sources: BEA, CBO
It’s called a “growth recession” and while an actual double dip would of course mean we were even further below the straight line in the graph–and sure, that would be worse—the goal isn’t to stay above zero. It’s to grow fast enough to put people back to work.
(Note: See my CBPP colleague Chad Stone’s revealing graph here on how the output gap in this period is so much larger than that of comparable periods in the past.)