This chart from the Federal Reserve Bank of Philadelphia depicts one of our central economic dilemmas. The most recent jobs report was perhaps the best yet since the start of the Great Recession, in 2007. Economic growth is real, but it proceeds on a degraded path in comparison to the full potential of the economy.
The blue line is actual Gross Domestic Product, adjusted for inflation. The black line is, or I should say was “full employment GDP” as foreseen in 2007 by the Congressional Budget Office. The vertical distance between the two lines is known as the output gap. Depending on how you calculate it, the gap runs from six to ten percent of GDP. One percent of current GDP is about $170 billion. One percent of national employment is about a million and a half people. In terms of current GDP (about $16.8 trillion), if you give up, say, five percent of GDP on a yearly basis from 2009 (the end of the recession) to 2014, you have given up $850 billion. More if you include the recession proper, defined as the peak of the business cycle to the ‘trough.’ The trough is the low point of the blue line.
To add to public confusion, the official end of the recession does not refer to a return to happy times. Rather, it refers to the point when the economy stops getting worse. The economy has grown since the end of the recession in 2009, but we’re still nowhere near full employment. The unemployment rate, defined as those looking for work divided by those looking and those employed, has fallen significantly since 2009, but an appreciable portion of that decrease is due to those who have given up looking for work, sometimes described as “missing workers.” In subsequent posts I will lay out more numbers on labor force drop-outs.
To make matters worse, the projections of potential GDP have been repeatedly revised downward since 2007. So the “output gap” has narrowed not because of an economic recovery, but because the longer-term outlook has worsened.
Underlying the revisions are downward revisions of projected labor force participation. These revisions should not be attributed to the aging of the population. That aging has been anticipated since the 1950s. Demographic projections are one of the more accurate projections made (setting aside predictions of immigration, which are totally uncertain given the role of politics in immigration policy). What is instead being observed are labor force drop-outs — unemployed workers who have given up looking for work — in excess of those due to aging.
What happens to the drop-outs? How do they live? I’ll return to this in later posts. The short, less-informed answer is that some take early Social Security, at age 62. They will regret this later, but people have to live. Some will apply for Social Security Disability. It doesn’t take a genius to figure out that this will place some additional burden on the program — more getting pay-outs, fewer paying in with payroll taxes. Others may disappear into the underground economy, working off the books when possible, outside the protection of workplace regulations and Social Security coverage.
As a general matter, if you want gory details on all this, you can consult Jason Furman, head of the president’s Council of Economic Advisers; Jared Bernstein, former chief economist to Vice President Joe Biden; Dean Baker of the Center for Economic and Policy Research, and often Doug Henwood of the Liscio Report.
One final note. I don’t want to elevate economic growth in terms of GDP as the be-all and end-all of economic policy. GDP accounting is not designed to include all-important non-market amenities, such as impacts on the environment or leisure time. Of course in lean times there are many who are not looking for more leisure time. There are better ways to grow without working and wasting resources to a fare-thee-well. More about this in days to come as well.