Yesterday, the head of the CBO, Doug Elmendorf, testifed on state of the economy. That assessment was generally somber
In the Congressional Budget Office’s (CBO’s) judgment, the economy will stop contracting and resume growing during the second half of this year, but the hardships caused by the recession will persist for some time. The growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will probably continue to rise into the second half of next year and peak above 10 percent. Economic growth over time will ultimately bring the unemployment rate back down to the neighborhood of 5 percent seen before this downturn began, but that process is likely to take several years.
As the Wall Street Journal noted:
The CBO’s most recent forecast shows that the economy’s output gap — the difference between its actual and potential output — will average 7% of gross domestic product (about $1 trillion) this year and next year. And that output gap will not close until 2013.
The concept of an output gap is a standard macroeconomic notion. It is how fast the economy can grow, given a certain level of increased capital and labor inputs (more machines & more people) and increased productivity (working smarter). In an earlier posting last November I discussed the fact that an underlying premise of the Obama economic stimulus package was transformation. Given that, I’m not sure what the longer term potential economic output really is. Rather than highlight the gap, let’s focus on the actual output levels – and think more about what a transformed economy means in terms raising that actual level of output.