The central economic problem of the moment is the gap between what we could produce and what we are producing. It is not the budget deficit, the debt, nor is it the absence of either a balanced budget or a Balanced Budget Amendment. It is not too much spending nor too high taxes.
It is the gap between how much the economy could produce and what it is producing…between the number of people who could work and who are working.
My CBPP colleague Chad Stone has a “nice”—I mean informative but ugly—picture of that gap in this “recovery” compared to past ones (with today’s weak GDP report, folks are now calling this the “recovery-less recovery”).
The picture makes two important points. First, growth out of the recession is proceeding more slowly than in past downturns (blue bar). Second, the output gap—the difference between the actual level of GDP and the level we’d be at absent the recession—is much larger than in past downturns.
That’s because a) the Great Recession was a lot deeper than the last two downturns, and b) unlike the last deep recession in the early 1980s, we didn’t bounce out of this one, as shown by the huge difference between the first and last blue bars in the figure.
There are many reasons for this difference. Some of them are less under our control—it’s a much more global economy now, and some of the demand pent-up over the recession leaks out on exports. Employers squeeze more productivity out of their incumbent workforce so they don’t have to hire new folks. Financial crises generate longer slogs out of the trough (and yes, that one was also largely self-inflicted).
Others are self-imposed. Particularly in this recovery, we’ve dropped the ball. The stimulus bill helped stabilize the situation, got GDP growing again, and helped a few million people stay employed. But despite the fact that the economy’s still so clearly below capacity, there’s nothing new on either the monetary, fiscal, or housing policy horizon (maybe some housing stuff percolating, but certainly not ready to launch).
To the contrary, policy makers are passionately engaged in precisely the wrong debate. Their fighting the budget deficit—or pretending to—while ignoring the jobs deficit.
Excess capacity…output gaps…below potential. They’re dry words, but what they really mean are millions of people, unable to do what’s so important to so many of us every day. Go to work. Provide for their families. Take a vacation. Send a kid to a cool camp. Save for the future. Repair the house. Take a course. Buy a nice outfit. Go out for dinner. Get ahead. Build stuff. Invest in stuff. Create stuff.
And all this “potential output”…it’s lost forever. You can’t go back and make it up. You can only try to get back on track ASAP.
So please, I beg somebody—explain to me why dickering around with the debt ceiling, spending precious hours on symbolic votes, or for that matter, cutting spending, education, investment, and safety net programs are so much more important than all those economic activities I just listed above.
OK…rant over. Back to analysis.
As others have pointed out today, the new GDP revisions reveal that Okun’s law—the relationship between changes in unemployment and GDP growth—remains intact. Before, it looked like unemployment was declining more than you’d expect given the decline in GDP. But it turns out GDP was actually falling a good bit faster than we thought. So, the statistical relationship remains intact…great news!
Compare the figure below to this one I posted earlier, based on the old data. The 2009 outlier that I was complaining about is now pretty much on the line.
The punchline is that as long as the rule is holding, unless GDP accelerates, we’re stuck in the doldrums. The goal is to slide down that fitted line much further into the lower right-hand quadrant (faster GDP growth, bigger decline in the unemployment rate).