Thursday, December 29, 2011

Growth rates and our depression

By my measure, the U.S. economy would need growth of real GDP of at least 3.36% to sustain the existing level of unemployment, without pushing it down.  Whether you believe that estimate or the estimate of 3.5% by Brian Cashell of the Congressional Research Service, the U.S. has not even hit that growth rate except in the second through fourth quarters after U.S. economic growth turned positive again.  Extrapolating the prevailing growth rates, the unemployment rate would only increase from here.  How fast, though, could full employment be restored with constant growth rates in excess of 3.36%?  According to my stats, it would go about like this:


From the graph it is apparent that real growth rates of about 4% would not bring the economy back to full employment in a relevant time-frame.  At a real growth rate of 5% it would take until late 2016 to recover.  On the other hand, growth rates of 6 or 7 percent would bring about a full recovery in early 2015 or  mid-2014, respectively.

If we were to believe that the problems of the U.S. economy are structural, we can look at a recovery in late 2016 to after the end of the decade.  The good news is that the evidence is not on that side of the argument.  What keeps the economy from full employment is aggregate demand, plain and simple.  There might be a few structural issues, but they would become apparent well after a serious stimulus had turned this unemployment situation around significantly.

There is a little bit of good news, but it's not very good.  For the last quarter of 2009 and the first two quarters of 2010, growth was high enough to drive some slight recovery.  Probable cause?  The Obama Stimulus.  Best Wishes for a Happy and Prosperous New Year!

2 comments:

  1. Very interesting ..... we can only hope the problem is not structural.....

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  2. As of yet, there is no real evidence to suggest that the issue is structural. If so, it would certainly become apparent if a policy of rapid expansion of aggregate demand were followed. Probably little, if any, of the problem is of a structural nature, although it may become structural in some sense the longer aggregate demand remains too low to assure full employment.

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