New Pictures From CBO on the Extent of the Damage

August 25th, 2015 at 2:24 pm

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.


Source: CBO

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.


Source: CBO

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.

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9 comments in reply to "New Pictures From CBO on the Extent of the Damage"

  1. Nick says:

    Very nice post. I’d just add that the CBO’s estimates are actually inconsistent with each other (my piece at CEPR):

    • Jared Bernstein says:

      Thanks for sharing that link, Nick. I had the same question re the data out today–the magnitude of their remaining output gap seems inconsistent with the fact that we’re almost at their unemployment rate at full employment. I wonder if slack not counted in the unemployment rate–LFPR gap and elevated involuntary part-timers–somehow explains the difference.

      • Nick says:

        I would guess that that is right. I think the definitional problem of only counting people as “unemployed” if they’ve searched within the past four weeks is proving unduly restrictive — works fine in normal times, but not when we’ve had a long bout of depressed demand, which can leave people out of work and cause them to stop searching for work. What’s interesting is that this isn’t just a problem of measuring “unemployment” versus “employment” — the U-4, U-5, and U-6 measures also show that the labor market is less recovered than the U-3 rate shows. So I think the specific definition of unemployment under the U-3 rate is a big problem.

    • Rima Regas says:

      Both excellent and complementary pieces. Thank you to the both of you.

      The only remaining question I have then, is what is our actual rate of unemployment? If U6 puts us closer to 11% than the official 5.something, then where exactly are we?

      On a related note… I’ve been reading Guy Standing on the precariat and even did a bit of my own “light” writing about it to familiarize the lay reader with the term. It would be nice to see a “good” piece on it to round out the discussions.

      • jonas says:

        There is nothing more or less “actual” about U6 vs U3 as a measure of unemployment. All six labor underutilization statistics measure different things. It is important for data users to decide what precisely they are trying to measure, and pick a statistic accordingly, rather than choosing a number they prefer in order to decide which statistic to use.

        • Rima Regas says:


          It isn’t a matter of picking a number I like more. It’s a matter of accounting for everybody in the economy and using a number that most includes that.

      • Jared Bernstein says:

        Hey RR: According to the Levin gap measure I used in a piece in the WaPo today, you’d roughly add a 1 or 1.5 ppts to the unemployment rate to get a better measure of slack, including the folks sitting out of the labor force and the involuntary part-timers.

        But “where exactly are we” is a harder question that it sounds like, because it assumes we know the unemployment rate associated with full employment (the way I read your question is “where are we relative to full emp”). If you think it’s 5% we’re closer than if you think it’s 4%.

  2. Jesse says:

    What is the correct policy response? Even if fiscal policy could close this gap (a statement that I am not convinced is true), politics will not allow for an expansive fiscal policy going into a Presidential election. This leaves the Fed as the only bastion of hope. So, If I’m reading this correctly, are you suggesting that the Fed should be doing more monetary easing?