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Monday, November 01, 2010

How long will it take?

This came up a few days ago over at Matt Yglesias' blog, and I made an off-the-cuff remark that it generally takes growth in real GDP in excess of 3% to bring the unemployment rate down. Well, I decided to be a bit more systematic, so (using quarterly unemploymenr rate and GDP data), I regressed the 4-quarter change in the unempoyment rate on the 4-quarter percentage change in real GDP. The resulting regression indicated that, if real GDP grows by 2.64% over a 4-quarter period, the unemployment rate will (generally) be stable. Faster growth than that, the unemployment rate falls; slower growth than that, it rises.

What does this mean for the economy? Suppose we want to get the unemployment rate down to 5.5% from its current 9.6%. Well, that'll take

1 year of 11.1% growth in real GDP or

2 years of 6.8% growth or
3 years of 5.5% growth

We just got a 2% (annualized) growth in real GDP estimate from the BEA...not good that rate, the unemployment rate would, on average, rise by o.3 percentage points per year. The San Francisco Fed is forecasting growth of 2.5% for 2010 (we ain't there yet) and 3.5% for 2011. If we got that, the unemployment rate would decline about 0.4 percentage points by the end of 2011; if the economy continued to grow by 3.5% for another five years, the economy would return to a roughly full employment state--in 2016. Also not good enough.

I have seen no forecasts of growth approaching 6.8% per year for any time in the near future.

Coming out of the recession of the mid-1970s, the economy achieved 4-quarter growth rates in excess of 6% for a four-quarter period from the first quarter of 1975 through the second quarter of 1976; we grew at an annualized rate greater than 5% from the 4th quarter of 1982 through the fourth quarter of 1984--two years. So rapid growth coming out of a recession is not impossible. But we've topped out around 4% in the last two (1991; 2001) recessions.

Unless something happens that leads to a much faster growth in real GDP than we seem likely to have, the unemployment rate will almost certainly remain high for many years. This is a scenario that should lead to more discussion of additional means of stimulating the economy.

What we seem to be getting instead is the return of what Paul Krugman has called the "austerians."

I have a bad feeling about this.


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