Sunday, August 26, 2012

Full Recovery by 2018, says the CBO

Twice each year, the Congressional Budget Office publishes a "Budget and Economic Outlook" for the next 10 years. The just-released August version offers a timeline for the eventual recovery of the U.S. economy to its pre-recession path of economic growth, and some worries about the budget fights that are scheduled to erupt later this year.

On the subject of eventual full recovery, the CBO regularly estimates the "potential GDP" of the U.S. economy: that is, what the U.S. economy would produce if unemployment was down to a steady-state level of about 5.5% and steady growth was occurring. During recessions, of course, the economy produces below its potential GDP. During booms (like the end of the dot-com period in the early 2000s and the top of the housing price bubble in about 2005-2006), it's possible for an economy to produce more than its potential GDP, but only for a short-term and unsustainable period. Here's the CBO graph comparing actual and potential GDP since 2000. The shallowness of how much the recession in 2001 caused actual GDP to fall below potential, compared to the depth and length of how much actual GDP has fallen below potential in the aftermath of the Great Recession, is especially striking. 

Read more: http://conversableeconomist.blogspot.com/2012/08/full-recovery-by-2018-says-cbo.html

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