reader john h. assertion PGL Closing the insane output gap. I found this 2017 exchange while searching The Economist Viewpoint.I don’t see the “crazy” assertion PGL (Certainly not as crazy as Friedman’s idea of a -18% gap), even though it was at odds with CBO’s (and Furman’s) assessment at the time that the economy was close to full employment.
this exchange (response Foreman):
PGL says…
I guess Jason Furman’s title will piss off some people. The last line sums up his post:“Combined with a 0.5 percent increase in labor input and a 1.3 percent increase in productivity, annual potential growth would be 1.8 percent.”
Well – even if we accept his premise, we shouldn’t accept his other assumption that current output = potential output. If the output gap is around 5%, as I and others believe, output growth could exceed potential growth by 1% between now and 2021. So a little arithmetic tells us we can get the growth rate closer to 3%.
Reply Wednesday, March 22, 2017 01:25
BenIsNotYoda said in reply to pgl…
PGL,
A 5% output shortfall would be huge. I hope you can provide evidence to prove this. very interested.Reply Wednesday, March 22, 2017 04:47 AM
BenIsNotYoda replied to BenIsNotYoda saying…
I agree with pgl that 3% growth rate is achievable. A 2% cap is an absurd conclusion.Reply Wednesday, March 22, 2017 04:50 AM
JohnH replied to BenIsNotYoda saying…
PGL has been known to make up any output gap he wants and then call others liars for citing official estimates…
Personally, I think I’m closer to CBO than Friedman, and am skeptical of -5% output gaps, -5% (or larger) estimates get stats (not bean counts) methods, such as the Blanchard-Quah method (see Deron):
figure 1. Cumulative GDP Growth Bias; edited by DeLong Corbyn, Gorodnichenko, Urad. source: Deron (2017).
The 2017 BQ shows an output gap of about 10%, which is very large, but not as large as in the 2017 quarter Friedman gap is -18% end of 2015.
Bottom line: Unlike GDP, there is no “official series” for the output gap. The Congressional Budget Office figures come closest because the government agency estimates them and reports them as part of its mandate. But the Fed, for example, has no official potential (although there are Green Paper estimates; there are also many internal board estimates based on a range of methodologies, as well as estimates via the Fed Bank Research Department). The OECD reports the U.S. output gap, but it’s not an official estimate of underlying GDP as anyone would say. So we can “make up” the output gap estimates, but in a way we can’t “make up” the GDP numbers or the CPI numbers…
