Sunday, August 7, 2011

Where We Are Now

I heard about the revisions in the GDP reports and how the puzzle about a "jobless recovery" has disappeared.

GDP for the second quarter was $15 trillion.  GDP is money expenditure on domestically-produced final output.

If it had remained on the 5.4% trend growth path of 1984 to 2007, it would now be $17.5 trillion.    GDP was 14% below trend.    For the second quarter of 2012, the value of that growth path will $18.5 trillion.   For GDP to return to that path in a year, the growth rate of GDP would need to be 23%!    

I have given up on that growth path and favor a shift to a modified noninflationary growth path.   The modified  path grows at 3% starting at the level of GDP in 2007.   If GDP were on that growth path, its value would have been about $16 trillion in the second quarter of 2011.   GDP is 6% below that modified growth path.   For the second quarter of 2012, the level of that modified growth path will be approximately $16.5 trillion.  To reach that growth path by the second quarter of 2012, the growth rate for GDP would need to be approximately 10%.

Real GDP was $13.3 trillion for the second quarter, and if it had remained on the 1984 to 2007 trend it would be $15.1 trillion.   It is approximately 12% below trend.   Civilian Employment is 139.6 million.   If it had continued on its 1984-2007 trend, it would be 155 million.   Employment is now 10% below trend.   The notion that we are producing plenty of output, but we just don't need those unproductive workers is false!

According to the CBO's estimate of potential output, it was $14.3 trillion in the second quarter of 2011.   (Well below the trend of real GDP.)    Real GDP is approximately 7% below potential.  

While I am very much aware of the possible error in the CBO's estimates, it should be noted that those estimates imply that nearly half of the shortfall of production is due to "structural" problems.    The reduced labor productivity (employment is 10% below trend and real GDP is 12% below trend,) is consistent with reassigned workers being slightly less productive in their new tasks.

The price level, (measured by the GDP chain type index,) is 113.   If it had continued on the 2.3% trend from 1984 to 2007, it would be approximately 115.6.   The price level is 2.2% below trend.     It would need to rise 5% to return to return to the 1984 to 2007 trend by the second quarter of 2012.   (I have no use for any type of price level or inflation targeting, but I do try to keep track.)

With real GDP approximately 7% below the CBO estimate of potential, the growth path of the price level (and wages) would need to drop about 7% for real GDP to rise to potential.    If GDP keeps on growing  about 3% and the price level rises 2% (consistent with the Fed's target,) then maybe by the end of the decade real output will recover to potential.     (Of course, if the Austrians and Real Business Cycle advocates are right, the CBO's estimate is way off, and real GDP is already at potential, no further deflation of prices or wages is necessary, and any increase in the current growth path of GDP would just result in higher inflation.)

With the modified target for the growth path of GDP that I favor, the target for GDP divided by the CBO estimate for potential GDP  in the second quarter of 2012 would be 113.4, ($16.4 trillion/$14.5 trillion,) implying an inflation rate of .3% over the next year.   If the CBO's estimate of slower than trend growth in potential output continues, then slightly higher inflation (near 1%,) would then gradually slow to .5% for the rest of the decade.

To sum up, the Fed should target GDP for the second quarter of 2012 to be $16.5 trillion.   Yes, it should commit to 10% GDP growth before the middle of next year.

P.S.  It is "former" Mayor Woolsey now.   It is a long story, but the South Carolina Supreme court closed down the Town of James Island.   They took my keys last week.   Unfortunately for my blogging, I am now chairman of "Free James Island" and am working on reincorporation.  Worse, I am committed to running for Mayor again, and hope to be back in office by the beginning of the year for a two year stint.   If the people of James Island agree, I will finish up about six months earlier than planned (December 2013 rather than September 2014.)


  1. We are getting Japanned.

    Yes, absolutely the United States can inflate. Sheesh, if we ran five percent inflation for five years, the value of the national debt outstanding would be reduced in value by a little more than 25 percent, while our economy expanded.

    Oh shocking, you mean the rates of inflation we had when Reagan was president? Oh, horrors!

    BTW, check out the CPI. From July of 2008 to June of 2011, the CPI-U rose from 219.964 to 225.722, or a 2.62 percent increase in three years.

    And this July is likely deflation, due to oil prices. Please bloggers, this August 20 (?) when July CPI figs come out, compare them to July 2008. I suspect we will be at about 2.5 percent inflation for the entire three-year period (annual about 0.8 percent).

    We are getting Japanned and hard!

    Why all the hysteria about minute rates of inflation in the right-wing? It speaks to a type of dementia. The Chicken Inflation Littles are running the right-wing roost.

    Ironically (and sadly) it was Milton Friedman who advocated aggressive and sustained use of QE in situations like we face today. He flat out told Japan to inflate. As did Bernanke!

    There are times when inflation is good, and now is one of those times.

    Okay, call it NGDP targeting--the fact is, inflation would help a lot of property owners and small business borrowers and the US taxpayer too.

    All the whimpering and pettifogging about debasing the currency comes from people with an unhealthy attachment to the symbols of money (gold or cash), as opposed to an appreciation of true wealth-building.

  2. On what basis does the state supreme court decide to overturn or accept a town's incorporation?

  3. Ah, here's their full decision with some account of the legal history of James Island's incorporation:

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