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Home Publications Blogs Beat the Press Two Percent GDP Growth Is Not Good News

Two Percent GDP Growth Is Not Good News

Tuesday, 23 October 2012 07:16

The Washington Post had an article highlighting the Fed's commitment to continue to buy long-term bonds for the foreseeable future, even if the economy looks somewhat better. It then gives a list of what it presents as relatively positive recent economic reports and says that the Fed intends to still continue its bond buying policies.

One of the items on this list is a forecast that the economy will grow 2.0 percent in the third quarter. It is difficult to view this as positive. The Congressional Budget Office puts the economy's potential growth rate at 2.4-2.5 percent. This means that with a 2.0 percent growth rate the economy is falling further below its potential. With a gap that is already close to 6.0 percent of GDP we should be seeing growth rates that far exceed the economy's potential rate of growth in order to get us back to potential GDP and full employment.

Comments (8)Add Comment
written by VicJane, October 23, 2012 10:37
And then when the private carriers exploit the USPS for the costlier part of the work (i.e., the final delivery to places the private carriers only go infrequenly) they call it their"mail innovation". See, e.g., http://www.upsmailinnovations....tions.html
Is potential growth really only 2.5% at most?
written by Gar Lipow, October 23, 2012 12:05
What are the assumptions under which 2.5% is the maximum potential? The CBO are really first rate at their job, but it is not always their job to consider politically unlikely events. What would GDP potential be with a 250 billion per year investment in green energy, maybe jumpstarted with a 1 time 600 billion dollar investment. (Those numbers would include funding for things like rail and other efficiency measures.) What would GDP potential be with Medicare for all. Forgiveness of all student loans and full funding of tuition and fees for all education in public schools below the PHD level, including public trade schools - all tuition, student fees, required recommended books and supplies, own-to-rent option for anyone with an underwater mortgage and so on.

Incidentally I really like this version of captcha. I have awful eyes and I can read it, get the entry right the first time.
Yes, the gdp growth rate isn't high enough to complete a recovery. However, in addition ...
written by David, October 23, 2012 12:10
The growth rate is anemic but Romney wants to claim it's all Obama's fault (Dodd-Frank, China, ... blah blah).

No doubt growth is slower because Obama listened to Summers and Geithner rather than Romer, and then conceding too/so much to the GOP that they stonewalled him on further measures. Something similar with China: Obama likes to find the middle ground, and then drive the agenda from there (if middle ground were to be found); it's a strength and a weakness with him. I still want to hear him be clear on his Medicare, SS and carbon footprint goals.

Despite his failures though, the 'conservatives', abroad and here, got us into this mess in the first place and their wrong-headed concerns about debt and austerity and 'confidence' (which they've destroyed) have crippled the growth rate and recovery. They're like an inexperienced driver when their car goes into a skid on ice and turns their wheels against the skid instead of into the skid (http://www.edmunds.com/how-to/...-snow.html ). The political right seems to focus on the impending doom to the extent of failing to take the proper action to evade it. Let's get their hands off the steering wheel.
driving and behavior
written by pete, October 23, 2012 5:06
Tests show that well trained drivers have a tendency to do the wrong thing even though they know it is correct. However, well trained drivers who have a certain brain defect which dampens certain behaviors do the right thing. In addition these same individuals do not suffer loss aversion (probably they would not be prone to money illusion and non-ricardianism). I think George Loewenstein is one of the authors of these papers.
GDP limit
written by Gar Lipow, October 24, 2012 1:41
I did not ask what current GDP growth was. I asked if potential GDP growth, the GDP we could reach if we implemented different policies was really as low as 2.5%.
Potential GDP growth is a full employment concept
written by Dean, October 24, 2012 3:54
potential GDP refers to how fast the economy could grow if the labor force were already fully utilized. this means that it cannot be affected at all by demand side issues, like student loan debt. It is equal to the growth of the labor force plus productivity growth.
written by Gar Lipow, October 24, 2012 11:29
Thanks Dean. Is the potential labor force based on emp-pop, or does potential labor force exclude those who have dropped out of the work force? Also I see why demand side would have no effect. But wouldn't public capital investment affect productivity? Is this an accounting identity, where capital investment has to be treated as part of demand side? Hope you don't mind explaining something basic here...
potential GDP would include people dropping out
written by Dean, October 24, 2012 8:00
Potential GDP is driven by demographics and longer term changes in society (e.g. women entering the paid labor force), so it would not be affected by people dropping out due to high unemployment. In principle returns to public investment should increase productivity growth and thereby raise potential GDP, but there is not a lot of agreement on the size of the impact.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.