A follow-up on the prospect of a long, painful recovery of lost jobs.
Potential GDP is a useful estimate of what the economy would be producing if it were not in a serious recession. The difference between potential and actual GDP is commonly known as the “output gap.”
Compare Figure 1 to the following measure of how long it is likely to take before we regain the jobs lost during the recession (Figure 2):
This chart (based on a Calculated Risk model) shows the time, in months, from the first loss of jobs to the full recovery of jobs at the level they were before the recession began. The recessions plotted are the three post-Reagan recessions, distinguished by the post-WW2 records they set for the duration of job loss and recovery. For the 1990-91 recession, 32 months. For the 2001 recession, 48 months, or 4 years. And for the current recession another new record still in the making, at 42 months and counting.
Figure 2 plots two projections of the time to full recovery for the 2007-09 recession: one is a simple linear trend (yellow line), the other a plot of exponential growth (pink line). Unhappily, the trend projection is roughly the same as the CBO projection for full recovery of GDP: 12+ years or sometime in 2016 or 2017. The exponential growth plot is what we might have had if there had been a serious fiscal response to the crisis. Or at least one of the intermediate plots (dashed lines).
But we missed the opportunity, and the political climate makes it unlikely anything substantial will be done now. The result will be even slower growth than the CBO predicts. (See Mark Thoma here, and Paul Krugman in the post already cited above.)
Note the rise in job recovery due to the employment of workers for the 2010 census. It’s usually dismissed as a merely temporary rise, or a distortion of the actual job recovery situation. But what it really shows us is what a strong fiscal response to the recession might have looked like. Imagine an intelligently designed jobs program, with job recovery boosted in the direction suggested by the initial employment of census workers. Supported long enough, it would have put pay in more workers’ pockets and boosted demand to the point where the economy could begin taking off on its own.