Graph of the Day: Our long-run growth problem

November 29, 2012

Wonkblog is starting a daily feature highlighting a graph that catches our attention.

During recessions and recoveries, economists are obsessed with the "output gap," or the discrepancy between what the economy actually is producing (that is, gross domestic product) and what it could be producing if it were putting all available resources to good use. The latter figure is called "potential GDP," and the United States has been running well below potential since 2007.

Worryingly, even though the U.S. economy starts to grow, there is no sign that the output gap is shrinking. We're growing fast enough that the gap isn't widening further, but we're not growing fast enough for the gap to disappear.

But we have another problem too. Potential GDP is also growing much more slowly than it used to. That's the story that this graph from Brad DeLong tells us. It compares CBO predictions of potential GDP from 2007 to the present. They've been getting steadily more pessimistic with each passing year, with the agency's most recent prediction of 2017 potential GDP (in constant 2010 dollars) more than $1.5 trillion lower than its prediction from five years ago:

Source: Brad DeLong

As Neil explained recently, this is the result of a number of longer-term factors. Potential GDP grew a lot in the 20th century due to technological innovation, women entering the workforce, and steady population growth, all of which increased the economy's capabilities.

But all three of those developments have slowed, and so potential GDP has as well. That's the major reason why this recovery has been so much weaker than previous ones. The best we can do is no longer good enough.

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