So Where Are We? Part I

A new semester is beginning, and with it get start another dialogue on the macro-economy with new group of students.  So to start the conversation I’m going to make a few posts that take a look at just where are we in the U.S. economy.

This first post is going to look at GDP and the growth trend (or lack thereof).  For my first expert witness I call Menzie Chinn of Econbrowser and the University of Wisconsin.  In a post last Monday (source here), he observes just how much the U.S. economy has lost as a result of the financial crisis and resulting Great Recession of 2007-2010.

In our forthcoming book [5], Jeffry Frieden and I tried to tabulate the likely costs of lost output associated with the Great Recession that followed the financial crisis driven by financial deregulation, lax fiscal and monetary policy, and ample capital supplies abroad. Using the January 2010 CBO projections, we calculated the cumulative GDP loss (relative to potential GDP) from 2007Q4-2014Q1 at 3.53 trillion Ch.2005$, 11349 per person (Ch.2005$), or about $12604 in current dollars).

Macroeconomic conditions, as well as the projections of potential output, have changed somewhat since I undertook that calculation earlier this year, so I decided to update the calculation. I present the estimated cumulative loss from 2008Q1-2010Q3, as well as the cumulative loss from 2010Q4-2011Q4.

Figure 1: GDP, in bn Ch.2005$, 2010Q3 3rd release (blue), mean forecasted GDP from WSJ January 2011 survey (red), potential GDP as projected by CBO. Light green figures are cumulative output gap figures for indicated periods. NBER defined recession dates shaded gray. Sources: BEA, GDP 2010Q3 3rd release, WSJ January 2011 survey, CBO, Budget and Economic Outlook: An Update (August 2010) – additional data on potential GDP, NBER, and author’s calculations.

Fears of overheating, when counterbalanced against the costs of lost output, seem somewhat misplaced in this context. [

Menzie (one of the premier academic econometricians around), projects that by 2014 the cumulative lost output in the U.S. from the crisis-recession (and the weak recovery policies following it) will be over $3.5 trillion, or over $12,000 per person in the U.S.

As the graph also shows, our recovery is weak and nearly non-existent.  Instead of “healing” and returning to health (long-term trend) as the economy did after recessions during the long 1948-2000 period, we have effectively said good-bye to a large chunk of the U.S. economy. What’s left is returning to normal growth rates, but we are not really recovering what was idled.  This is not good.