Paul Krugman, winner of the Nobel Prize for Economics and NY Times blogger, believes there is a big difference between the technical end of the recession, which has probably happened, and anything resembling satisfactory performance.
To make his point, he presented the following chart on his blog on Tuesday:
The chart compares actual GDP since the recession began with what it would have been if the economy had continued growing at its trend (from 1999 to 2007). What it shows, says Krugman, is that we’re something like 8 per cent below the point where we should be.
As he explains (our emphasis):That translates into lost output at a rate of well over a trillion dollars per year (as well as mass unemployment). And we’ll keep suffering those losses, even if GDP is now growing, until we have enough growth to close that gap. Since there’s nothing in the data or anecdotal evidence suggesting any gap-closing in progress, this is a continuing tragedy.
Now, while that’s bad enough, it could get worse because there’s still the distinct possibility a double-dip recession might rear its ugly head — since much of the ‘technical end’ is down to fiscal stimuli and inventories, or what Krugman calls ‘one-time’ factors. As he puts it:
There’s a tendency to treat worries about a double dip as outlandish, as something only crazy people like the people who, um, predicted the current crisis worry about. But there are some real reasons for concern. One is that the lift from fiscal stimulus will start to fade out in a couple of quarters. Another is that, as Yellen points out, most of the boost we’re getting now is tied to inventories. And that’s a one-time thing.
Related links:
The shape of things to come is probably not V – FT Alphaville
Slackers at the Fed – FT Alphaville
How big is the ouput gap? – Fed Bank of San Francisco study