Brad DeLong has influenced my thinking on the current state of the economy. In a recent post where he looks at data on output relative to hours worked, he writes,
CEA Chair Greg Mankiw said last week that the 3.5% per year real GDP growth rate that the administration is projecting should make the unemployment rate next year lower than it is today. When I look at these productivity-and-output graphs, I can't see it. Output has to grow nearly 1% per year faster than productivity in order to hold the unemployment rate steady, and that can be the case with a 3.5% output growth rate only if trend productivity growth is now less than 2.5% per year. After staring at these figures, it seems to me likely that unemployment is likely to rise with anything less than 4% real GDP growth rate over the next several years...
What Brad sees--and I agree--is a remarkable rate of productivity growth, which in turn means that potential GDP is rising sharply. The result is a drop in labor utilization during what otherwise would appear to be an economic upturn.
For Discussion. How does the issue of whether or not labor utilization is the key cyclical indicator affect one's view about whether or not macroeconomic policy today should perhaps be more stimulative?