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The output gap in two graphs


Neil Irwin (with graphics help from Alicia Parlapiano) has a series of interactive graphs explaining both what's wrong with the economy and how long it will take to fit itself at different rates of growth. I've copied one of the first atop this post, and this comes from Neil's introduction:

Compared with a healthy economy, about 7 million working-age people and 5 percent of the nation’s industrial capacity are sitting idle, not producing what they could. The economy is growing again, but at a rate — less than 2 percent in recent months — that’s too slow to keep up with a population that keeps increasing and workers who keep getting more efficient.

This is the output gap, the divide between the amount the United States can produce and what it is actually producing. The gap, currently $900 billion, explains why we feel so miserable more than a year into what is technically classified as an economic recovery.

Here's the takeaway graph:


I spent the morning listening to Martin Feldstein, Paul Krugman and Jan Hatzius offer their economic forecasts. None of them projected 6 percent growth anytime soon. None of them projected a return to 5 percent unemployment anytime soon.

By Ezra Klein  | October 5, 2010; 12:59 PM ET
Categories:  Charts and Graphs, Economy  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Health insurers vs. health-care reform
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The gap represents the cost of the recession, which is being calculated in real time over at Dean Baker's site here:

Preserving the accumulations of wealth held by business, banks and individuals will do nothing to close the gap. Stimmulus and wealth taxation will produce the required growth. Funny post here:

Posted by: Brighton21 | October 5, 2010 2:35 PM | Report abuse

Ezra, thanks for these graphs, especially the first one since it starts to answer a question I've had nagging at me for a while. The question was: "the bursting of the housing & financial bubbles has led to 10% unemployment (minimally measured). But since they were bubbles, that means they weren't sustainable. So what would the unemployment rate have looked like pre-2008 if there hand't been a bubble?"

One thing the graph shows is that, despite the enormity of the bubbles, they hadn't actually put the economy above the "potential output" line, not like the tech bubble at the turn of the '00s had done. (And that is borne out by the fact that average wages were still pretty stagnant throughout the Bush "growth" years vs. the slight improvement in average wages seen at the end of the '90s.)

However, it still doesn't answer the question of what unemployment would have looked like without the bubbles. Would we have had 7, 8, 9, 10% unemployment in 2006 if home buyers, home builders, lenders, derivatives packagers, ratings agencies, etc, hadn't all gotten so irrationally exuberant? (And if someone out there has answered that question, please point me to it!)

Posted by: JonathanTE | October 5, 2010 2:37 PM | Report abuse

This chart is impossible. Really really smart people assured us that all we needed was a small stimulus as an insurance policy, and then everything would take care of itself. Any day now everything will be back to normal.

Posted by: B405 | October 5, 2010 4:10 PM | Report abuse

No, the reason for a minimum of 5% employment is not that "some people will always be between jobs". That's the result not the reason. The reason is that the Fed will raise interest rates to cool off the economy thereby raising the unemployment rate if it goes below 5% (the so-called structural unemployment rate).

Posted by: wgartist | October 5, 2010 4:51 PM | Report abuse

But then the deficit hawks a few panels later were talking about the need to make repairs to fiscal issues--followed immediately by claiming that NO taxes should be "raised" until 6 months of 6% or lower unemployment.

Posted by: klhoughton | October 5, 2010 5:25 PM | Report abuse

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