Estimating Potential Output

at CBO, is described in detail in this working paper. Also, here is a comparison of implied output gaps from various organizations, through 2016.

Source: Shackleton (2018).

Updated CBO projection here. Discussion of comparison to statistical filters in this post from a few days ago, which includes this graph:

Figure 1: Cyclical component from Hodrick-Prescott filter (blue), from Baxter-King band pass filter (red), Hamilton filter (green), and output gap from CBO (gray), all in logs, estimated from 1967-2020 data. NBER defined recession dates shaded gray. Source: BEA 2020Q4 2nd release, CBO (February 2021), NBER, and author’s calculations. 

A comparison of some other methods in an older Econbrowser post.

21 thoughts on “Estimating Potential Output

  1. Moses Herzog

    The most high risk member of our household got their 2nd Moderna shot today. The 2nd one is supposed to be a little rough, but not too worried about it. 2 more weeks on wearing the mask to wait for the antibodies to catch hold and we’re on the “downhill slide” with this garbage. I’d say it’s about 75% we will continue on wearing masks even past that 2 week margin. Now all that’s left to do is write hate mail to donald trump. Which brings up an important question: “Is it ‘wrong’ to threaten violence against orange colored people??” Think of this as a question in the same vein as “Would you have killed Hitler as a baby if you knew what was coming??” After 548,000 people have died from Covid-19 in America alone, while the orange abomination was running around telling everyone Covid-19 is “a hoax”, a “liberal joke”. Just a kind of mental exercise for fun.

    1. 2slugbaits

      I got my second Moderna shot a little over a week ago. It knocked me on my butt for about two days.

      1. Moses Herzog

        Interesting. Appreciate you sharing. If it’s not too personal a question, was it pretty “immediate” after taking the shot, or was there kind of a “delay” or “lag” before it hammered your immune system a little?? I realize it’s different with different people, but I’m still curious. We’re bordering 6 hours here, and I am kind of expecting it to effect this person.

          1. Moses Herzog

            I’m not joking, I appreciate the answer/ isolated data point.

            I mean it’s not like I thought this person/would drop dead, or I wouldn’t have set them up to get the shot (I believe there were only 3 places you could get it when I set it up online, outside of our ClusterF state health dept (which royally botched our first appointment which was for a Pfizer shot around Mid Feb as I recall). I believe OSDH here calls it “the portal”. I think they got that terminology from a Buck Rogers repeat er something. So when OSDH F’ed up our first appointment I decided we’d get it at a private “non-portal” location. The state health department, OSDH, have a similar reputation to a Mrs Judy Shelton, uuuuuuhh, “renowned” you might say. If I showed you all the negative stories out of there from the last 25-30 years of Republican management you’d think I dropped the case docket for the Weinstein trials. Anywayz…….. This person, alongside of being old, hits every comorbidity checkbox under the sun. Nonetheless we’re at roughly 27 hours post syringe shot and other than a very mild hurt around the shot location it’s been bewilderingly smooth. The only thing I think might have helped is this person takes 400–800 IUs of vitamin D, but I am cynical that even that helps that much.

      2. Jack

        My second shot had a similar effect. Started feeling really bad about twelve hours after the shot, felt like a very achy flu. Lasted 12 hours. Lifted right before cocktails.

    2. JohnH

      I’m two weeks past my 2nd Pfizer. No problems, except that my wife got hers yesterday and it seems to have knocked her out, so much so that she can’t rescue me. I went shopping and bought too much to walk home with!

      1. Moses Herzog

        @ JohnH
        Sounds like a “first world problem”. It could be worse, you could be “Karen” at the onion burger joint, and someone just asked you to put a mask on. [ friendly teasing ] Remember, even MAGA people have their own cross to bear in life…….. “freedom of movement” “Right to let your kids find your poorly hidden household gun and shoot themselves” “Right to leave baby Timmy in your enclosed car on 105°F summer day for 16 hours” “Right to kill U.S. Capitol police when ‘blue lives matter’ was momentarily inconvenient”.

        We’re all learning together with Marjorie Taylor Greene that life can be “a living hell”.

  2. pgl

    Should Big Pharma waive intellectual property rights to Covid vaccines?

    Dean Baker, a senior economist at the Center for Economic and Policy Research, retweeted a debate on the case for waiving some intellectual property rights on Covid-19 vaccines, while experts from the International Federation of Pharmaceutical Manufacturers and Associations argued that the focus should be on companies’ profits first.

    We went through this debate 20 years ago with Bayer’s Ciprofloxacin

    ‘The recent threat of biological terrorism involving the Anthrax virus incited a debate about whether the United States government should use its powers under 28 USC §1498 to take a compulsory license on the drug ciprofloxacin in order to stockpile it. Negotiating a deal with Bayer allowed the United States to stockpile ciprofloxacin at a substantial discount while avoiding the negative consequences of issuing a compulsory license. Under 35 U.S.C. 1498, the United States government has the authority to issue a compulsory license; however, the government may not have the authority under the TRIPs agreement. In fact, under the interpretation of the TRIPs agreement that the United States has adopted in previous situations when other countries wanted to issue compulsory licenses on pharmaceuticals, the United States most likely would have violated TRIPs if it had issued a compulsory license for ciprofloxacin. Furthermore, the policy decision to have strong patent protection and to not have price controls on pharmaceuticals in the United States has led to the development of a very strong pharmaceutical industry that leads the world in the development of innovative drugs.’

    My understanding is that the cost of manufacturing a dose of ciprofloxacin were mere 20 cents while Bayer was selling doses for over $4.50 a dose. The US finally got Bayer to sell it doses for $1 a dose.

    Moderna’s 10-K filing shows that it collected $800 million in revenue in 2020 but the cost of production was a mere $8 million.

  3. pgl

    I’m happy that I will be getting my 2nd dose of the Pfizer COVID19 vaccine but now I want more. This started when I heard Krispy Kreme will give out free doughnuts to those of us who got vaccinated. They are the best doughnuts ever but damn it – Brooklyn does not have a single Krispy Kreme shop.

    And now this – vaccine passports:

    I want one right away!

  4. Moses Herzog

    I guess I was aware of this stuff, but not quite to this amount of detail. I thought this was a pretty well done show, You can watch it in its entirety at this link. It’s kind of stomach turning but helps put a lot of things in context:

    For example I wasn’t quite aware of the friction between Unions and early Asian Americans, and although I am very pro-Union, this has to be one of the darker and more shameful aspects of labor unions’ record. But not just Unions should be held to blame here, but those looking for cheap labor no matter the cost, and that includes even intra-racial (single race) schemes of pitting workers against each other.

  5. pgl

    “It is rare enough for the economy to be 5 per cent above potential, as it last was in 1966”

    This statement by Jeff Frankel in his post got me checking with FRED on real GDP v. potential real GDP (ala the CBO measure). It does seem that we were more than 5% above potential as of 1966Q1 and still 4.9% above it in 1966QII. We reached 2% above potential as early as the summer of 1965 and stayed near 3% above potential through early 1969.

    With the 1964 tax cut, the Great Society programs, and the Vietnam War build-up fiscal stimulus was fierce and sustained during LBJ’s full term as President. Yea we got that run up in inflation but it was a very strong economy in so many ways.

    The latest fiscal stimulus is a one-time boost to an ailing economy. The inflation fear mongers need to take a chill.

  6. ltr

    March 24, 2021

    More on Open-Source Versus Patent Monopoly Financing of Drug Development
    By Dean Baker

    It is often said that intellectuals have a hard time dealing with new ideas. Unfortunately, for purposes of public debate, open-source government funding of drug development is a new idea, and people in policy positions seem to be having a very hard time understanding it. So, I will try to write this post in a way that even a policy wonk can figure it out.

    The basic idea of government funded research should not be hard to grasp since the government already funds a large share of biomedical research. The National Institutes of Health gets over $40 billion a year in federal funding, with the Biomedical Advanced Research and Development Agency (BARDA) and other government agencies getting several billion more. This puts the government’s total spending in the $45 to $50 billion range, compared to a bit over $90 billion from the industry. So the idea that the government would fund research really should not be that strange.

    Most of the public funding does go to more basic research, but there are plenty of instances where the government has actually funded the development of new drugs and also done clinical testing. But under the current system, most of the later stage funding does come from the industry and is funded through patent monopoly pricing. Relying on open-source government funded research for later stage development and testing would be a major change.

    The Outlines of a System of Government Funded Research ….

  7. Tom Michl

    The CBO paper is very useful. I’m still working through it, but am struck by how little attention it pays to possible alternatives to the Solow model plus Okun’s Law. Probably too much to ask, but since CBO work influences policymakers, they deserve a more balanced view.

    If anyone is interested, I’ve written a short paper on why we shouldn’t call it potential GDP.

    It cites this blog (I hope in a respectful way) which has influenced my thinking.

    BTW, arent comments supposed to be on topic?

    1. Menzie Chinn Post author

      Tom Michl: Yes, we aspire to that, but the requisite time commitment to defining what’s on-topic vs. off- is too large to devote (at least for me, during the term.)

      1. Moses Herzog

        I’m not comparing myself to these guys. And I empathize with Menzie more than he imagines taking flack continually for his charitability to all of us, by running this blog, much to the benefit of joe six pack guys of non-exceptional intelligence (like me) and still “taking Sh*t from all sides”. But may I toss up the shotgun fodder that some of mankind’s greatest ideas came when guys just interact without worry to the topic at hand??

        I think one of the reasons why Paul Krugman is so respected, is because he makes the effort to reach out to those with less than a Master’s degree to increase their understanding, including silly gigs (but utterly hilarious comedy genius) on Stephen Colbert, to reach out to people who think that economics is a bunch of “gobbledygook” when the people it effect the most are those on the lower economic rung.

        BTW, I about die every time I watch this, even though I’ve watched it at least 5 times at this point. It makes me laugh nearly as much as the Jeff Macke nervous breakdown on CNBC (but for VERY different underlying reasons)

        1. Moses Herzog

          “We can’t judge each other, right Paul??” [Krugman gets look on his face] Folks if I could put the look on Krugman’s face into a bottle and pass it out, it would put all comedians of the world out of business.

      2. Tom Michl

        Actually had posters, not the host in mind. I think we all appreciate the time you put into this site.

  8. Tom Michl

    I’ve now been through the CBO paper and frankly, I call BS on this. I was not aware that they stopped actually trying to estimate the NAIRU sometime before the GFC and started just assuming that unemployment rates by demographic in 2005 were ‘full employment’. This by definition rules out any hysteresis-like effects of the GFC! Since their estimates of the NAIRU form the basis for estimates of the potential labor force, this corrupts their calculations of potential GDP. There are many other fudge factors (some actually working to increase potential, such as their disbelief that TFP growth is as low as it seems), and their dogmatic reliance on the Solow model is just risible. The CBO methodology needs to be reformed. At the least, they need to start recognizing alternative interpretations of macro data. Pretty sad picture of the state of macroeconomics, imho.

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