Sunday, January 20, 2013

Okun's Law

Okun's Law posits that the unemployment rate increases by 1% for every 2% gap between real GDP and full-employment real GDP.

The current unemployment statistics show that the unemployment rate is 7.7%.  Does this mean that the GDP gap is 14%.  If this is true than the economy is way off of its potential output.

The BLS estimates that real GDP is $15,797.4 Billion.  Unless I messed up, the full employment output is $18,009 Billion.  If taxes increase, and government spending decreases, the economy could sink further into recession.  

If the economy is growing at 3% per year, it will take two more years to reduce the unemployment rate to 5.5%.  Unfortunately, it doesn't work like this.  I project that the US economy will be mired in recession for six more years.

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