Justin Wolfers on America’s Lost Half-Decade

by Reihan Salam

Though I can’t imagine I agree with Justin Wolfers prescriptions for jumpstarting the economy, I’m a great admirer of his writing. He has a post highlighting Jeremy Nalewaik’s work comparing “the income- and expenditure-side estimates of U.S. output growth” that is worth chewing over. Nalewaik’s basic argument is that GDI, or gross domestic income, is a better reflection of true output growth. And a GDI analysis tells us that our economy has been in bad shape for longer than we tend to think. Nalewaik writes:

“GDP” can mean either the true outputvariable of interest or an estimate of that output variable based on theexpenditure approach—two very different things. Furthermore, since GDI has a different name than GDP, it may not be initially clear that GDI measures the same concept as GDP using the equally valid income approach. To keep things straight, this paper refers to the true variable of interest as true output, to the expenditure-side estimate of true output as GDP(E), andto the income-side estimate of true output as GDP(I).

Armed with GDI estimates, Wolfers observes that:


GDP remains below its levels nearly five years ago. The economy had already run out of steam halfway through Bush’s second term. That’s why I say we are halfway to a lost decade.

Even this isn’t a fair comparison, as the population has continued to grow.

Real gross domestic product per capita, according to income, is 96.2 percent of its 2006 peak. According to expenditures, the approach Nalewaik deems flawed, it is 99.1 percent. So, as Wolfers goes on to write, we’re scrambling to get back to where we were in 2006:

It’s going to take a long while to return to where we were back in 2006. Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006.

If this sounds like a case for monetary policy activism to you, Raghuram Rajan begs to differ. (And I assume others will enthusiastically rebut his take.)