James Pethokoukis

Politics and policy from inside Washington

The GDP report and Okun’s Law

Aug 2, 2010 19:47 UTC

One of the mysteries of the Great Recession is why unemployment rose so far so fast. The usual rule of thumb, Okun’s Law, called for a much lower rate of joblessness.  The White House has been hoping that as the economy turned around, the labor market would outperform just as it underperformed during the downturn.  As it turns out, the downturn was deeper than first thought, so the “snapback” scenario is less likely. This from JPMorgan:

The revisions incorporated in last Friday’s GDP report go part way toward resolving two puzzles concerning the recent recession and recovery.

First, the unemployment rate had arguably looked too high relative to the decline in output experienced over the course of the recession. The first chart below estimates an Okun’s Law (the relation between GDP and unemployment) through 2006, and then since 2007 sees what that would predict about unemployment given the revised and pre-revised data.

The pre-revised GDP data implied that the Q1 unemployment rate should have been about 8.7%, the revised data imply it should be 9.1%. Both estimates fall short of the 9.7% unemployment rate actually experienced that quarter, though the newer data close about half the gap.

The forward-looking implication of partly resolving this first puzzle might be seen as negative, as some had argued that the excessive increase in the unemployment rate meant companies over-fired and that a snap-back is coming. The over-firing argument now looks less compelling. (To be sure, we’ve never found any tendency for Okun’s Laws errors to subsequently reverse themselves).

okun

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Really, David Stockman?

Aug 2, 2010 19:33 UTC

David Stockman, Ronald Reagan’s budget chief, attacked Republicans in the NYTimes today. Does he really think the U.S. economy would be better today if the top marginal income tax rate was still 70 percent and the tax code left unindexed for inflation? Then there’s this bit:

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s.

Now let’s see, was there anything else happening in 2009 that might have had some impact on tax revenues? I seem to remember something. Now what was it. Oh yeah, it was this:

gdpchart2

gdpchart

COMMENT

I hate to say it Mr. Pethokoukis but your nothing more than a Republican corporate hack who is often wrong in his analysis. You must be a charter member of the Glenn Beck/Rush Limbaugh club.

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