\u201cCBO now\u00a0<\/em>projects<\/em><\/a>\u00a0growth will slow to 1.1 percent in 2023 and an average of 1.2 percent in 2024 and 2025 \u2014 the\u00a0<\/em>slowest sustained growth the U.S. has seen<\/em><\/a>\u00a0outside of a recession, according to Commerce Department data going back to 1929. Before the pandemic, <\/em>the CBO\u00a0<\/em>projected steady growth<\/em><\/a>\u00a0of between 1.6 and 1.8 percent, rather than a dramatic boom and a leveling off.\u201d<\/em><\/p>\n\n\n\n He goes on to conclude:<\/p>\n\n\n\n \u201cYes. U.S. economic output\u2026will be higher in the coming years than it would have been if the American covid-19 response hadn\u2019t been as aggressive. But there\u2019s a catch \u2026. it\u2019s likely that, because the boom of 2021 and 2022 helped GDP reach its potential more rapidly, the rate of growth in 2023 will be slower than it would have been without stimulus\u201d<\/em><\/p>\n\n\n\n Is it likely<\/em>? The CBO forecasters had to acknowledge the reality of recent surging labor productivity. But rather than view that change as significant, they chose to insist that their earlier guess for sustainable productivity gains was correct. That completely arbitrary decision led them to forecast meagre prospective productivity growth ahead, and is central to their forecast of a swoon for 2023-2025 real GDP growth. <\/p>\n\n\n\n CBO\u2019s insistence on this dour view forces them into pretty improbable territory. Glance at the chart below. It reveals that the flow of output, second half 2021, is deemed to already be well above the economy\u2019s potential. With unemployment still close to 6% and with labor force participation still quite depressed, declaring that the economy is already in excessive territory, seems hard to support. I think it is flat out wrong. <\/p>\n\n\n\n Deconstructing CBO\u2019s Potential Output estimate<\/strong><\/p>\n\n\n\n CBO\u2019s characterization of potential is driven by three assumptions. Sustainable annual gains for U.S. labor productivity will average around 1.8%. Full employment for the U.S. economy is centered a bit above 4%. At full employment U.S. labor force growth is capped at around 0.3% per year. Combine these three items and you end up sketching out CBO\u2019s version of the upside boundary for U.S. real GDP.<\/p>\n\n\n\n Again, however, embracing these assumptions forces you to assert that the economy, as we enter the second half of 2021, is already operating above its sustainable level, strikingly at odds with common sense amid very high joblessness, very low labor force participation and very low levels of capacity utilization for our industrial sector.<\/p>\n\n\n\n How might we modify an estimate of potential, so that it squares with the notion of ample excess labor and production capacity, mid-2021? Simply acknowledge that the spurt for productivity, over the past 6 quarters, need not be followed by a productivity swoon.<\/p>\n\n\n\n Additionally, we can revisit the question of full employment. CBO asserts that employment levels extended beyond safe levels, throughout 2018 and 2019. But there was little evidence of wage and or price pressures in late 2019. Labor force conditions then may have been at, but not beyond full employment after all, at that time.<\/p>\n\n\n\n Consider those two factors, and a post-boom 2%, not 1%, real GDP growth performance is easy to pencil in. <\/p>\n\n\n\n Productivity\u2019s Trajectory Need Not Mean Revert. <\/strong><\/p>\n\n\n\n CBO embraces the pre-pandemic consensus view on sustainable productivity gains, 1.8% per year. But over the 6 quarters ending in 2021:Q2, labor productivity wildly outstripped this performance, rising at around a 3.4% annualized pace, nearly double CBO\u2019s sustainable rate.<\/p>\n\n\n\n![\"Real](\"https:\/\/krieger.jhu.edu\/financial-economics\/wp-content\/uploads\/sites\/96\/2021\/07\/cbopic.png\")
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![\"Histogram](\"https:\/\/krieger.jhu.edu\/financial-economics\/wp-content\/uploads\/sites\/96\/2021\/07\/prodpic.png\")
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