Daniel J. Mitchell
Recommend this article

I’m not a very exciting guy. It’s Saturday afternoon and I’m perusing the Budget and Economic Outlook from the Congressional Budget Office.

But sometimes it pays to be a nerd because I just found an interesting tidbit of information. Here’s what CBO says about the anemic economic output we’re experiencing compared to the growth we should be enjoying.

…output is likely to remain below its potential (or maximum sustainable) level until 2017—almost a decade after the recession started in December 2007. CBO estimates that real GDP in the fourth quarter of 2012 was below its potential level by about 5½ percent; that gap is only modestly smaller than the gap (of about 7½ percent) that existed at the end of the recession in mid-2009 because growth in output since then has been only slightly faster, on average, than growth in potential output.

Let’s translate this bit of jargon into English.

What CBO actually is saying is that the economy hasn’t enjoyed the bounce of above-average growth that normally follows a recession (and we have more than 130 years of data showing this is the normal pattern). As a result, instead of recovering all the lost output associated with the downturn, we’re still suffering from sub-par levels of output.

CBO specifically says that we were “about 5½ percent” below potential at the end of last year. That’s about $880 billion of lost output. Not exactly a ringing endorsement of Obamanomics.

But that’s just part of the story. CBO also looks at the cumulative output gap.

With such a large gap between actual and potential output persisting for so long, the cumulative loss of output relative to the economy’s potential between 2007 and 2017 will be equivalent to nearly half of the output produced last year.

Since output last year was $16 trillion, the cumulative output gap is $8 trillion. That’s a ton of money, even by Washington standards.

Here’s a chart from CBO showing this output gap.

Recommend this article

Daniel J. Mitchell

Daniel J. Mitchell is a top expert on tax reform and supply-side tax policy at the Cato Institute.
TOWNHALL FINANCE DAILY

Get the best of Townhall Finance Daily delivered straight to your inbox

Follow Townhall Finance!