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The Output Gap: A Dire Prediction for Our Economic Future

Neil Irwin has done a great job explaining the output gap, the difference between the rate at which the economy is producing and what it could produce with full employment. The space in between basically equals the unemployment rate, and the annual shortfall is nearly a trillion dollars.

This graph shows the output gap in a very precise way, and what to expect in the future:

As you can see, with sustained 6% growth, it would take until 2012 to get a normal rate of employment. And nobody expects 6% growth anytime soon. With the rate of growth that we experienced in the last quarter remaining constant at about 2%, the unemployment rate would be expected to rise to 11.9% by 2020.

And that’s closer to what we can expect.

[Robert Gordon] belongs to the committee of distinguished economists who officially declared on Sept. 20 that the U.S. recession ended way back in June 2009. Don’t mistake that pronouncement for optimism. According to Gordon’s research into the long-term determinants of growth, America’s next two decades are going to be disappointing. He predicts that between 2007 and 2027, gross domestic product per capita will grow at the slowest pace of any 20-year period in U.S. history going back to George Washington’s Presidency. Although the data he examined closely go back only to 1891, he says that based on his knowledge of early American economic history, he thinks it is fairly safe to predict that the period will witness the slowest growth ever in GDP per capita and, therefore, American living standards.

That would be a 30-year, unbroken period of low economic growth and no income growth. We’re staring into the abyss here.

Even the most conservative economist agrees that the stimulus was far too small to fill the output gap. If we don’t do something drastic, we’ll have lost a generation of economic growth, and caused suffering for tens of millions of Americans.

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David Dayen

David Dayen