A Few More Reflections on Today’s GDP Report

July 29th, 2011 at 6:11 pm

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).

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8 comments in reply to "A Few More Reflections on Today’s GDP Report"

  1. Tom in MN says:

    I now see you as a junior officer on the Titanic: Great News Captain! We know why we are sinking…


  2. Nylund says:

    The previous Okun’s Law post was interesting. The “theorist” in me is somewhat happy to see the traditional relationship more or less hold. The “me” that actually lives and works in this country (and cares for its present and future well-being) isn’t.


  3. foosion says:

    >>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.>>

    If you’re a Republican member of Congress, it makes sense, because your priorities are defeating Obama and cutting taxes. As Boehner said, if we lose some jobs, so be it.

    If you’re a Democratic member of Congress it might make sense because the leader of your party apparently wants it.


  4. jo6pac says:

    I’m not sure what happened maybe it’s just the wine but I agree with you this time. In the end Amerika will become the Baltic States and everyone else that has gone down this path of uncle milton freidmans who cares about Main Street. You must look back at the time you spent in the beltway and wonder ? It’s amazing how different it looks from out here in the jobless recovery world and I love those that say this could send us in to a double dip recession. Hell, Main Street never left the recession/depression. What a joke and here’s a little something that caught my eye today about No One Goes to Jail it gave me a laugh on how sad this nation has become. Oh I’m sure the theater will only get better but the actors are of the lowest level of ?
    http://www.commondreams.org/view/2011/07/29-3


  5. Geoff Freedman says:

    The latest on the Senate floor is that McConnell won’t negotiate with Reid, he wants to negotiate direcly with Obama. A philibuster is to begin on the Senate floor in the mean time.

    The point of this is we are simply not dealing with politics as usual, and this country is very close to imploding whether people choose to see this or not. It was never likely that there would be a compromise, but it was hard (and is hard) for people to see that because most people don’t realize that this really is not politics as usual. Its something else. So you can’t come to the normal conclusions.

    I think the likely scenario is that Obama is going to have to pull the string on one of the improbable scenrios (14th amendment, selling options on US property to the Fed. reserve, etc.).

    What all this has to do the economy is that we are very close to tanking into depression. There is no consumer demand; too much wealth has been distributed at the high income end. I don’t really know how this default scenario will actually play out, but I expect it to be negative and to adversly impact the economy.

    More than that we need badly to regress our taxes so more income and wealth flows to the middle class, and to stimulate our economy (but pointedly and very specifically measures to create some more demand). We need to reimpliment a modern version of Glass Steagal and separate investment and commercial banks and modernize our banking regulations, reregulate Wall Street, and regulate deriviatives and create a transparent formal market for them.

    In this climate, this most likely won’t happen. Most likely we will see lower taxes and lower government spending and the results will not be good.


  6. Misaki says:

    >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.

    Ironic.

    Perhaps we should share around the infinite vacation many people are on?

    >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.

    Because having a public-debt-to-GDP that continually rises causes people to have low self-esteem, and most people who aren’t economists don’t like inflation.


    • Joseph Patrick Bulko MBA says:

      Ultimately, the debt ceiling “crisis” is just one big distraction by both political parties in Washington to allow them to ignore the real problem: The U.S. economy is incapable of creating enough jobs for all the people who need them! The high unemployment problem is so intractable that creating fake crises is the “solution” provided by the warring factions in Congress. However, in this current economic climate where everyone seems to be under the spell of Milt Friedman and Ayn Rand, most folks would prefer a private-sector solution to the mess we’re in. Here’s my idea: A private-sector solution to the high unemployment problem that uses the power of capitalism and free enterprise (and not whining about the government’s inaction). The mortgage-backed security (MBS) based financial industry meltdown provides the perfect template. Simply replace the MBS with what I’ve designated as a venture-backed security (VBS) and, voila, a tsunami of new business creation and lots and lots of new jobs (=incomes =increased consumer spending =booming economy) and the U.S. economy is turbo-charged back to full employment. Of course, the VBS (similar to the MBS) is yet another form of financial nitroglycerin, which does indeed raise the possiblity of another Wall Street-fueled financial industry meltdown. However, we need jobs so the risk is worth taking. Read the details of the proposal here: http://jpbulko.newsvine.com

      Joseph Patrick Bulko MBA


  7. Misaki says:

    There is absolutely nothing anyone has said to convince the general public that further government spending would reduce inequality, and people are willing to sacrifice the opportunity to have a minimum-wage job if it prevents high profits from reaching Wall Street. The idea that fiscal stimulus = corporate profits, of which what, over 40%? goes to Wall Street, is firmly entrenched in people’s minds.

    Unemployment certainly means lower (or no) income, but what people who find the deficit situation unbelievable do not understand is that many unemployed people feel that having a balanced government budget is more important than for them to personally have a higher income. People with high incomes naturally want other people to be as comfortable as them, yet somehow fail to realize that the unemployed are looked down upon exactly because they are on endless vacation.

    >The punchline is that as long as the rule is holding, unless GDP accelerates, we’re stuck in the doldrums.

    Based off the assumption that everyone wants to work 40 hours per week. As long as working full-time (or more) is seen as being in society’s interests, the growth models embodied by Okun’s Law Abiding Behavior will hold true; if this common understanding about benefit to society by working full-time changes, then Okun’s Law Abiding Behavior would no longer accurately predict employment based on GDP growth in the short term, although it might settle into the same relationship in the long term after the economy adjusts.

    The assumption of full-time work creates a very stiff, and inflexible framework for economic growth. Some people might think it illogical for society to be in a form where doubling productivity could potentially be a very bad thing, since it would put half the population out of work.


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