I don't believe the projections or the implications to unemployment for two related reasons:
1) Most measures of economic performance across time (unemployment, inflation, gdp, etc) are revised only a couple of times, before we have final estimates we are confident in. The final estimates depend on the measure, but they are available anywhere between 1 month and 6 months after the economic activity occurred.
The CBO measure of potential GDP does *not* work this way. Every time these numbers are revised, the **entire series** is revised. That is, when we come up with a new measure of potential GDP we not only have new numbers for what happened recently, we have new numbers for everything that happened since the 1960s.
The most drastic adjustments will come to the projected potential GDP, for which this analysis of unemployment is based on.
2) Related to this problem is how the potential GDP projections are taken as fixed in the analysis. Not only should we be weary about revisions of the projections, sluggish growth can actually cause potential GDP to decrease; but the analysis assumes potential GDP will stay the same no matter what growth rate we look at.
Potential GDP is measured by taking a production function with capital, labor, and technology to the data. The estimate for potential GDP is what would be produced if we use all labor and capital available with some given level of technology. If we have sluggish growth for a long period of time as suggested by one of the scenarios, there will be relatively low levels of investment, and therefore low growth for capital, and possibly even low levels of technological progress. Relatively less capital and less technology means *potential* GDP growth will be sluggish.
The good news is (but it's not that good) with even low levels of growth we will likely reach potential GDP more quickly than this graphic suggests, because the potential line will come down as the actual GDP line goes up. As we reach potential GDP we will likely have less unemployment.
The bad news (and this is bad) is related to the reason we like having jobs - we like having income to buy stuff, whether the stuff are luxurious goods and services or it is essentials to keep our houses over our heads and our families fed and clothed. Less economic growth still means less stuff, no matter what the unemployment rate and potential GDP are equal to.
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I don't believe the projections or the implications to unemployment for two related reasons:
1) Most measures of economic performance across time (unemployment, inflation, gdp, etc) are revised only a couple of times, before we have final estimates we are confident in. The final estimates depend on the measure, but they are available anywhere between 1 month and 6 months after the economic activity occurred.
The CBO measure of potential GDP does *not* work this way. Every time these numbers are revised, the **entire series** is revised. That is, when we come up with a new measure of potential GDP we not only have new numbers for what happened recently, we have new numbers for everything that happened since the 1960s.
The most drastic adjustments will come to the projected potential GDP, for which this analysis of unemployment is based on.
2) Related to this problem is how the potential GDP projections are taken as fixed in the analysis. Not only should we be weary about revisions of the projections, sluggish growth can actually cause potential GDP to decrease; but the analysis assumes potential GDP will stay the same no matter what growth rate we look at.
Potential GDP is measured by taking a production function with capital, labor, and technology to the data. The estimate for potential GDP is what would be produced if we use all labor and capital available with some given level of technology. If we have sluggish growth for a long period of time as suggested by one of the scenarios, there will be relatively low levels of investment, and therefore low growth for capital, and possibly even low levels of technological progress. Relatively less capital and less technology means *potential* GDP growth will be sluggish.
The good news is (but it's not that good) with even low levels of growth we will likely reach potential GDP more quickly than this graphic suggests, because the potential line will come down as the actual GDP line goes up. As we reach potential GDP we will likely have less unemployment.
The bad news (and this is bad) is related to the reason we like having jobs - we like having income to buy stuff, whether the stuff are luxurious goods and services or it is essentials to keep our houses over our heads and our families fed and clothed. Less economic growth still means less stuff, no matter what the unemployment rate and potential GDP are equal to.
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