Jared Bernstein’s “new normal” potential GDP is similar

Today Jared Bernstein published a graph with a red line representing a new normal for potential GDP.

I was surprised because the line looks very similar to the line I have been publishing for months for effective demand.

Mr. Bernstein does not give an equation for his line, but only a definition…

“The other two lines approximate the potential growth by extracting a smooth trend from the underlying G.D.P. series, controlling for cyclical movements.  The yellow line shows the trend if you stop that trend extraction process in 2007.  The red one shows what happens if you use the full series right through last week’s revision.”

The equation I use is “real-time” and not dependent on statistical smoothing. You can derive potential GDP just from the data in one quarter, You do not need a series of data in time.

Potential GDP = real GDP – a * (capacity utilization/effective labor share – 1)

a = business cycle amplitude constant in 2009 $$, currently estimated at $3.4 trillion… effective labor share is determined by a central tendency line (which crosses the origin of a graph) between capacity utilization and the index for labor share: business sector. The slope of that line for 2009 base year is estimated at 0.762.

Mark Thoma linked to my original graph back in April. No impact was noticed after that. So, it will interesting to see if Mr. Bernstein’s graph creates a reaction, because economists are less sure now of potential GDP than they were months ago.