In his latest New York Times column Paul Krugman turns to potential GDP:
Lehman failed ten years and two weeks ago; this coming Wednesday will be the 10th anniversary of the enactment of the Troubled Asset Relief Program, aka the bailout. In honor of the anniversary, there have been approximately 1,000,000,000 pieces reflecting on the 2008 financial crisis and its effects. Many have suggested, rightly, that the political fallout continues to shape our world today. But as far as I can tell, surprisingly few have focused on the long-run economic effects.
What’s odd about this relative neglect is that even a cursory look at the data suggests that these effects were huge. It’s true that U.S. unemployment is back below it was before the crisis; although it’s not widely realized, euro area unemployment is also way down, not quite to eve-of-crisis levels but well below its pre-crisis average. But in both cases we’ve returned to sort-of full employment at a much lower level of real GDP than informed people projected we’d reach before the crisis struck.
Better late than never, I guess. Where was this Paul Krugman in 2009 and 2010? That’s when continued attention would have done the most good. At this point anyone who gives the slightest credence to Keynes’s theories would realize that after 10 years structural changes would surely have taken place and at least some of that potential GDP was now completely beyond reach. Today the very best evidence that there is still unrealized potential GDP is if the stimulus applied by the Trump Administration actually has any measurable effect.
Additionally, at least to my eye Dr. Krugman persists in an error I frequently encounter. In what is potential GDP denominated?
So, prediction is hard, especially about the future.
Don’t have time to read the entire piece right now, but does he have an explanation for why the slopes are different?