02
Oct
2018
Actual vs. Potential (Real) GDP
So here is what the CBO/BEA now say, from 2000 through the present:
Now be careful: The series for potential real GDP is quoted in 2009 dollars, whereas the real GDP series is in 2012 dollars. So to make them apples to apples I multiplied the former by 1.0639, because this calculator said that was the conversion rate (at least in terms of CPI, GDP deflator would be different but I don’t think it would be a huge difference).
So anyway this is all relevant to the thoughts here.
(BTW I’m on a conference call as I’m posting this, so I decided to stop trying to offer hypotheses to reconcile all this. But as of right now I’m not sure what is going on. It’s hard for me to reconcile this chart with DeLong 2013 and Krugman last week, but I’m not sure what is going on.)
That’s pretty much what one would expect.
I think one can visualize that if the trend line from pre-2008 continue to 2018 then potential GDP could easily be about 8% higher in 2013 and 11% in 2018 and so be consistent with Krugman’s chart.
There is still an output gap in q3 2013 based on this chart but a bit smaller than his 5.5% , so I doubt he would change his story much.
Yeah but something still doesn’t add up, Transformer. Back in August 2013 DeLong was saying potential GDP was about 1% below trend, while actual GDP was 5.5% below trend. Now the CBO says potential GDP was 8% below trend, but that that was still higher than actual GDP.
So something is screwy but I haven’t had time to isolate precisely *what*.
My theory is.
– By 2013 potential GDP numbers has already been reduced significantly from 2008 and the output gap for 2013 was deLong’s 5.5% at that time.
– between 2013 and now potential GDP has been reduced a bit more and hence we see the output gap at around 4.5 (or so) we see in the above chart.
– DeLong 1% number was bogus all long. He got it from ‘ (19%-14% fall in investment share) x 4 years x 5%/year return on capital = 1% reduction in potential GDP’. It would be odd if he didn’t know in 2013 that potential GDP had already been reduced by the CBO though.
I think Capt. Parker’s number are fairly consistent with this:
Taking the numbers for Q1 2013 (Which would be close the current ones at the time the discussion took place) I see:
– An output gap based on 2013 estimate of potential of just over 5.5%, consistent with deLong’s number’s
– An output gap based on 2018 estimate of potential of around 4% (close to Bob’s chart)
– A decline in potential between 2008’s numbers and 2018’s numbers of around 8% (consistent with Krugman’s chart)
– This decline of 8% is made up of 2008-2013 decline (6%) and 2013-2018 decline (2%) consistent with my theory above,
What I ma struggling to understand is this:
Assuming these charts were around in 2013 why was this discussion even taking place ?
– Why were DeLong and (probably) Krugman seemingly unaware that potential GDP had been significantly revised downwards by 2013?
– Why didn’t Bob just point to the CBO data that showed a 5%+ decline in potential between 2008 and 2013 and declare a KO against deLong ?
–
Here’s a slightly different correction where the series is 2009 dollars is set to 100 in June 2009 and the series in 2012 dollars is set to 100 in June 2012. I’m not claiming this is exactly correct but at least it says we were at potential GDP at the peak of the housing bubble and not below it.
https://fred.stlouisfed.org/graph/?g=lrdt
I’m with Transformer on this. Even though Krugman/DeLong had it wrong about how much potential GDP had dropped post-recession there was still a big output gap in 2013. And even though Dr. Murphy was totally correct to be concerned about lower investment dampening potential GDP, the thing about the potential GDP numbers is this: It is impossible to parse out what amount, if any, of softening of the potential GDP growth rate post Great Recession is due to bad investment in the pre-recession boom vs how much is due to lower investment in the post-recession stagnation. If you want to claim that the post-recession flattening of potential GDP is totally predicted by ABCT you need to also deal with the fact that in the very early days of the Great Recession the Potential GDP path was still showing rapid GDP growth was possible.
Thanks Capt. Parker. I can’t fully digest your comment yet, but can you please chime in on how you stand vis-a-vis my propositions (A) and (B) in the other post? I.e. do you agree that Krugman’s position was:
(A) Then: Since potential GDP hasn’t fallen, the actual drop in GDP is due to lack of Demand, so Keynesians are right.
(B) Now: Since potential GDP fell off a cliff, the Keynesians are even righter than we realized at the time.
Obviously that’s a self-serving way for me to paraphrase his positions, but do you agree that I’m basically right in summarizing them in this fashion?
Dr. Murphy,
I think the world of you but, I think you are wrong about A. I think Krugman’s position during his 2013 pile on was more like: “We have a big output gap. Government isn’t doing enough about it. DeLong is so great for pointing this out. If Murphy is claiming there isn’t an output gap here in 2013 he is just plain wrong and deserves derision.” This is how I read his blog post that you provided a link to anyway. I’m not endorsing Krugman’s position (as I interpret it.) I’m just saying that I disagree with your characterization of what he wrote then.
I need to reread the most recent Krugman post to be sure how I feel about B but, tentatively, I have to say I also disagree with your characterization in B. I don’t think Krugman is claiming the drop in potential GDP “proves” Keynesians were right that the Great Recession was all about a drop in aggregate demand and not about structural problems. I think he takes “all about AD” as a given. I think he is saying: “Oh look, failure to adopt Keynesian stimulus can lead to a protracted slump and that slump can really hurt potential GDP. You fools really need to come around and believe us Keynesians when we tell you what you need to do to end a depression now.”
You are indeed owed an apology for DeLong/Krugman slapping you for not knowing potential GDP projections had not changed much between what was published in 2008 and what was published in 2013. Truth was, the potential GDP numbers were falling continually during that time. I’ve attempted to put a graph together showing historical potential GDP series using ALFRED: https://alfred.stlouisfed.org/graph/?g=lrsq This says that potential GDP as estimated in 2013 was far below what was predicted from the potential GDP series published in 2008. BUT there was still an output gap in 2013 if you compare RGDP published in 2013 to potential GDP for 2013 from the most recent potential GDP estimates published in 2018. The output gap with the latest numbers is only 4% not the 5.5% claimed by DeLong in 2013.
(Note that there is the same problem of the various series using chained dollars with different basis years. I used the following corrections in an attempt to make everything be comparable to chained 2012 dollars.
Chained 2012 dollars =:
Chained 2000 dollars x 1.349 or
Chained 2005 dollars x 1.181 or
Chained 2009 dollars x 1.049 or
These correction factors when applied to RGDP series published at different times with the various chained dollar units using different basis years will get all the RGDP series to report the same RGDP level for the 2006 timeframe. It’s a fudge but the best I could do.)
Anon, thanks for the thoughtful reply. Let me ask you this: What was the “homework” problem that I should’ve done more carefully, according to DeLong/Krugman back then? Were they lecturing me about the output gap directly, or about a different number?
Dr. Murphy,
I think the world of you but, I think you are wrong about A. I think Krugmans position during his 2013 pile on was more like: “We have a big output gap. Government isn’t doing enough about it. DeLong is so great for pointing this out. If Murphy is claiming there isn’t an output gap here in 2013 or that Potential GDP doesn’t account for changing investment levels he is just plain wrong and we should mock him.”
This is how I read his blog post that you provided a link to anyway. I’m not endorsing Krugman’s position (as I interpret it.) I’m just saying that I disagree with your characterization of what his point was then.
I need to reread the most recent Krugman post to be sure how I feel about B but, tentatively, I have to say I also disagree with your characterization in B. I don’t think Krugman is claiming the drop in potential GDP “proves” Keynesians were right that the Great Recession was all about a drop in aggregate demand and not about structural problems. I think he takes “all about AD” as a given. I think he is saying: “Oh look, failure to adopt Keynesian stimulus can lead to a protracted slump and that slump can really hurt potential GDP. You fools really need to come around and believe us Keynesians when we tell you what you need to do to end a depression now.”
For what it’s worth, you are owed an apology for DeLong/Krugman slapping you about potential GDP levels for 2013 not having changed much between what was published in 2008 and what was published in 2013. Truth was, the potential GDP numbers were falling continually during that time. I’ve attempted to put a graph together showing historical potential GDP series using ALFRED: https://alfred.stlouisfed.org/graph/?g=lrsq This says that potential GDP as estimated in 2013 was far below what was predicted from the potential GDP series published in 2008. BUT there was still an output gap in 2013 if you compare RGDP published in 2013 to potential GDP for 2013 from the most recent potential GDP estimates published in 2018. The output gap with the latest numbers is only 4% not the 5.5% claimed by DeLong in 2013.
(Note that there is the problem of the various series using chained dollars with different basis years. I used the following corrections in an attempt to make everything be comparable to chained 2012 dollars.
Chained 2012 dollars =:
Chained 2000 dollars x 1.349 or
Chained 2005 dollars x 1.181 or
Chained 2009 dollars x 1.049 or
These correction factors when applied to RGDP series published at different times with the various chained dollar units using different basis years will get all the RGDP series to report the same RGDP level for the 2006 timeframe. It’s a fudge but I don’t think I’m off by that much)
(Capt Parker I responded to your comment which earlier went through as “Anonymous”)
Sorry about the double post. I hit submit before entering name etc. and assumed the post went into oblivion.
Dr. Murphy, you asked “What was the “homework” problem that I should’ve done more carefully, according to DeLong/Krugman back then? Were they lecturing me about the output gap directly, or about a different number?”
I think the lecture was about you not attempting to quantify how big an effect the investment shortfall might have on the macro economy.
So it was, indirectly, a lecture about the output gap.
Capt Parker wrote: “So it was, indirectly, a lecture about the output gap.”
LOL, okay, but what was it DIRECTLY a lecture about?
Directly – about magnitude of the softening in investment softening.