The Congressional Budget Office just released their periodic update of our fiscal and economic outlook. Journalists often focus on their deficit projections as that’s the coin of the realm (the budget office found that near term deficits go down before they start going up). But I’m here to show you what I humbly submit are two important pictures of just how lasting and relentless economic slack—the under-utilization of our economic resources, including people—has been over this business cycle.
The first picture shows potential GDP against actual GDP in real dollars, where potential GDP is the output you’d expect at full employment. The recession is clear but note that all the way through the first half of this year, actual GDP still hasn’t linked up with potential.
The second figure applies the same sort of concept to unemployment, with the “natural rate” line giving you CBO’s estimate of the jobless rate commensurate with full employment.
The cost of these gaps is staggering. Output forgone is lost forever. Families that struggled with long months of unemployment can’t get those months back. The gap between actual and potential GDP in 2014 amounted to 4% of GDP—about $700 billion in today’s dollars, over $2,000 per person. That’s $8,000 for a family of four that’s missing due to these persistent gaps.
What’s “interesting”—as in “depressing”—about this is that the obsessive focus on the deficit has hamstrung the fiscal policy that should have been applied to closing these gaps. So pardon me if I don’t get flustered with joy that the deficit’s coming down or enraged that it starts going up again.
If policy makers had been doing their jobs, these gaps would have been closed well before today.