My Least Favorite Macroeconomic Statistic
Posted on May 14, 2014
John Cochrane writes,
Philadelphia Fed President Charles Plosser made this nice graph, showing how reduced views of potential GDP are closing the gap, not rises in actual GDP.
Obviously, it would help to go to his post and look at the graph. But potential GDP is perhaps my least favorite economic statistic. Keep in mind that potential GDP refers to real GDP, not nominal GDP.
How to define potential GDP? I think then when you come down to it, the definition is “what GDP would be if there were no shortfall of aggregate demand.” So I think that in order to buy into potential GDP, you have to be really committed to the AS-AD paradigm.
How is potential GDP arrived at? I think that the process involves taking a graph of the history of GDP and fitting trend lines in between the peaks, perhaps with some smoothing thrown in. Since we never know what the next peak of GDP will be, we pretty much never have a good idea of potential GDP in real time, only in retrospect.
When I think in terms of PSST, there is no analogue to potential GDP. Patterns of specialization and trade are always breaking and re-forming. When patterns break, unless the break is caused by war, disaster, or government policy, it is probably the economy’s way of freeing up resources that otherwise would remain misallocated. When new patterns form, it is only a good thing if the patterns are sustainable for a decent interval of time.
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