CBO’s Outlook and the Output Gap

CBO released its projections for GDP under current law, and potential GDP yesterday.

Figure 1: GDP (black), CBO projection (red), and CBO estimate of potential GDP (gray), all in billions of Chained 2012$, SAAR. Source: BEA 2020Q4 advance, CBO, An overview of the Economic Outlook (Feb 1, 2021).

To reiterate, the CBO projection is under current law, taking into account the December recovery package. This projection implies that the output gap in 2020Q4 was 3% and 2.3% in the current quarter. Does this mean we can sit on our hands? Consider:

  • The projected output gap does not shrink to zero until the beginning of 2025.
  • The projected output gap is 360 billion Ch.12$ in 2021 alone, and 670 billion through 2023 (that is $421 billion and $801 billion respectively in nominal terms).
  • These calculations rely upon the CBO estimates of potential. An alternative measure of maximal output (per Delong and Summers, BPEA 1988, described here) implies a larger output gap of 553 billion Ch.12$, in 2021 alone.






42 thoughts on “CBO’s Outlook and the Output Gap

  1. Jake formerly of the LP

    I’m not sure I’m buying 4.6% growth for the year. There are a lot of vaccinations yet to go, and even if some sectors come back, other sectors that benefitted from more people staying home will likely fall back.

    I’d also like to see how much the participation rate comes back, as that also plummeted as COVID broke out.

  2. pgl

    The output gap debate got really hot 5 years ago in light on Bernie Sanders progressive fiscal policy proposals, which BTW included tax increases to partially pay for the proposed extra spending. Today we have Biden’s somewhat progressive fiscal policy proposals and some concern from the let’s give more tax cuts for rich people that the output gap is too small and the fiscal push is too big. Given that Senator Sanders is now the chair of the budget committee, who testifies should be interesting.

  3. pgl

    Joe Manchin thinks a $15 minimum wage is too high. Go figure. Now he would supports $11 and having that adjusted for inflation:


    Go back to 2016 – Obama wanted it to be $10 while that socialist Hillary was calling for $12 so I guess Manchin thinks he is cutting the middle. But wait in the past 5 years the price level has gone up so his $11 an hour (2021$) is about the same as Obama’s rather conservative proposal.

    Come on Joe – get with the program!

    1. 2slugbaits

      The current minimum wage of $7.25 was set in 2009. Adjusting for CPI-U inflation the minimum wage today should be around $8.75. Of course, if the minimum wage in 2009 was too low, then so is the $8.75 inflation adjusted number. The $15/hr minimum wage isn’t something that I’d go to the wall over even though it would be phased-in over a few years. I think we can be fairly sure that raising the minimum wage to something like $11 or $12 an hour probably wouldn’t adversely affect adult employment, although it might affect teenage employment. But I don’t think we can be that confident about a $15/hr minimum wage. Ultimately it’s an empirical question and I’m not committed to any specific minimum wage. I wouldn’t dismiss Manchin’s proposal out of hand, especially if it includes an automatic inflation adjustment. In any event, Biden isn’t going to be able to find 50 votes for a $15/hr minimum wage so it’s kind of a mute point. And I’m sure the Biden team knows that. I’ve always understood the $15/hr provision as something to be negotiated away.

      1. pgl

        “The current minimum wage of $7.25 was set in 2009. Adjusting for CPI-U inflation the minimum wage today should be around $8.75.”

        Since Jan. 2009 CPI-U has risen by 23.5% so my arithmetic puts this at $8.95. And yea that was too low.

        Now if we took that $1.60 per hour nominal wage back in 1968 and did the same exercise, we would be at $12 an hour. And of course per capita income today is higher than it was in 1968.

        1. 2slugbaits

          Since Jan. 2009 CPI-U has risen by 23.5%

          Right. I was just comparing the average annual inflation data, not the monthly data.

          My first job paid $1.60/hr. Lousy pay but I absolutely loved the job.

          1. pgl

            In Menzie’s new post he updates the real minimum wage chart (using 2019$). Your $1.60 back then compares to $12 today. Not great but better than the current $7.25.

    2. Willlie

      He is from West Virginia. The crazy part is that a more progressive agenda should benefit West Virginia as much or more than any other state.

  4. Steven Kopits

    Why would the recovery of GDP with a vaccine be gradual?

    Why would people simply not go back to work?

    1. pgl

      Such a naive question even for you. I guess in your little world there has been no economic disruptions over the last year. No business has gone under. No one has lost their job. All people have to do is to go back to their routines a year ago. Nice ivory tower you must live in.

    2. baffling

      the rollout of the vaccine is not discrete. it is gradual. and services recovery will also be gradual, as people need to break their current habits and slowly recapture some of their previous habits. remember, most workers did not lose their job or have hours diminished. they have continued to work fully throughout the pandemic. what changed is how they commute, eat, entertain, etc. i don’t see those behaviors changing overnight. my wife got the jab, but i do not yet qualify. this limits her freedom to a big degree, even with the vaccine. the recovery will be elongated during the vaccine distribution.

      1. 2slugbaits

        Also, it’s not obvious that even having 80% of the population vaccinated will be enough to return things to normal. We have good evidence that the vaccines are very effective at saving lives, but we still don’t know if they will prevent spread. A restaurant experience isn’t quite the same thing if you still have to wear a mask even though you’ve been vaccinated. And it’s not just a US problem. We need to get the world vaccinated ASAP or it’s just a matter of time before the virus mutates and ultimately frustrates today’s vaccination efforts.

        1. baffling

          recent data from AstraZeneca study seems to suggest the vaccine does have a significant effect in reducing transmission, which is good. however, it is beginning to appear to me that we will almost always be chasing the virus because it has become so widespread. this means it will continually mutate going forward. yearly or booster shots will be required, just like the flu. i think you begin to look towards asia, and how they periodically wear masks, to see what the future will probably look like. we will go maskless every 6 months, then have a scare that changes our behavior. nothing will be mandated, but the smart folks will continue to wear masks out for quite some time, i believe.

        2. pgl

          I hear that the AstraZeneca vaccine may be effective at reducing transmission. But yea – they are still doing Phase III trials.

      2. Steven Kopits

        Baffs –

        You’re speaking as though the economy were far from normal. It’s really not. Distillate consumption is above pre-pandemic levels. Gasoline is 10% down, but that’s really not that much. Jet is still down 30%, but it’s not a huge use of energy all said. GDP is 4% off normal, if I read the graph right. It’s not that huge a gap. Do I believe behavior can change in, say, eight weeks if things look better? Absolutely. People are dying to get out of their houses and lead a normal life again. Do I think we’ll have a residual gap of, say, 1% or so. I think that’s plausible, but I don’t hear a lot of people saying, “I’ll never go to a restaurant again no matter what.” Just the opposite!

        1. pgl

          “You’re speaking as though the economy were far from normal.”

          If you do not realize that it is far from normal, you do live in an Ivory Tower. Sure you can find a few economic stats that have not moved that much but then I guess that only shows you care about statistics and not people. Hey Stevie – I sure hope Amazon does not go on strike as it might be dangerous for you to have to venture out into the real world.

    3. Willie

      Because their jobs are gone and will only come back slowly, just like happens in nearly every other recession. If I can figure that out, it can’t be that hard.

    4. Ulenspiegel

      “Why would the recovery of GDP with a vaccine be gradual?”

      Worst case: The vaccine does not reduce transmission, “only” reduces severe cases. Would 20% of the population got a shot really make a difference when you still need some lock down etc.?

      A herd immunity by vaccination can only be reached in late summer or autumn of 2021. For next year it will make a huge difference IMHO.

      1. baffling

        if the vaccine does not resist spread, then you really will not reach any herd immunity. i hope that is not the case. mutations make herd immunity a moving goal post. probably not a good policy choice.

        1. Ulenspiegel

          “if the vaccine does not resist spread, then you really will not reach any herd immunity. i hope that is not the case.”

          Strictly speaking, herd immunity refers to not developing a severe form of the illness, you can reach this state by vaccination or natural infection. You simply do not produce severe case any longer in an exponential way. You may still get infected or even transmit the virus.
          The hope is of course that a vaccine also reduce transmission. However, here the data are rare for covid vaccines…

          1. baffling

            we have little data to say that mutated viruses will only create minor sickness in those that were vaccinated. i guess the jury is still out. but the fact that we are already looking at booster shots to address the mutations says that is a legitimate concern. this will impact our ability to achieve herd immunity.

      2. Steven Kopits

        By implication, therefore, you believe the speed of recovery hinges on the efficacy of the covid vaccines. But this has nothing to do with the organic pace of recovery. It’s a pure bet on vaccine efficacy. If the vaccine works and is widely available by, say, Labor Day, then what is the constraint on economic recovery? Has demand been destroyed or merely suppressed? Big difference between the two. If it has been destroyed, then restaurants can re-open and no one will come. If suppressed, then the binding constraint will be the pace at which restaurants can re-open, to choose one example. Which model better fits the circumstances, in your opinion?

        1. pgl

          The only binding constraint in your world is this virus? Man you are both an idiot and also an uncaring blow hard.

  5. ltr

    February 2, 2021



    Cases   ( 27,027,347)
    Deaths   ( 457,856)


    Cases   ( 10,778,206)
    Deaths   ( 154,635)


    Cases   ( 3,852,623)
    Deaths   ( 108,013)


    Cases   ( 3,224,798)
    Deaths   ( 77,238)


    Cases   ( 2,239,943)
    Deaths   ( 59,386)


    Cases   ( 1,869,708)
    Deaths   ( 159,100)


    Cases   ( 786,420)
    Deaths   ( 20,213)


    Cases   ( 89,594)
    Deaths   ( 4,636)

  6. ltr

    February 2, 2021

    Coronavirus   (Deaths per million)

    UK   ( 1,586)
    US   ( 1,378)
    Mexico   ( 1,226)
    France   ( 1,182)

    Germany   ( 707)
    Canada   ( 532)
    India   ( 111)
    China   ( 3)

    Notice the ratios of deaths to coronavirus cases are 8.5%, 2.8% and 2.4% for Mexico, the United Kingdom and France respectively.

  7. ltr


    February 3, 2021

    Chinese mainland reports 25 new COVID-19 cases

    The Chinese mainland recorded 25 new COVID-19 cases on Tuesday – 15 local transmissions and 10 from overseas – the National Health Commission said on Wednesday.

    Of the locally transmitted cases, 8 were reported in Jilin Province, 6 in Heilongjiang Province, and 1 in Hebei Province, the commission said.

    No new deaths related to COVID-19 were registered on Tuesday, and 91 patients were discharged from hospitals.

    A total of 12 new asymptomatic cases were recorded, while 829 asymptomatic patients remain under medical observation.

    The total number of confirmed COVID-19 cases on the Chinese mainland has reached 89,619, and the death toll stands at 4,636.

    Chinese mainland new locally transmitted cases


    Chinese mainland new imported cases


    Chinese mainland new asymptomatic cases


  8. pgl

    Some reporter just ask Biden’s press secretary about what the Penn Wharton model is saying about their fiscal proposal. She bristled that this model is at odds with other models. For example – does it really assume we are not at full employment? Maybe our host can find what this model is saying and make a new post about it.

  9. Barkley Rosser

    Regarding the minimum wage and the Covid relief proposal, an important issue is whether or not changing the minimum wage will be allowed to be part of a reconciliation package/process. I understand that this is up to the Senate parliamentarian, or somebody like that, who has not issued a decision, and supposedly knowledgeable people do not know what that now quite powerful person will say.

    Anyway, given that McConnell seems to be going full throttle on throwing up roadblocks to the relief bill and just causing trouble, unsurprisingly, despite nice noises coming from his moderate 10 who visited Biden, but with a way-too-small proposal and no obvious movement towards a compromise, this means it is very likely that indeed the Dems will have to use the reconciliation process to get it passed, which can be done with 51 votes in the Senate, although that requires either Manchin to be on board or to get at least one GOP to join in, not all that likely if it goes more or less as it is.

    But if it does go through reconciliation, now looking way more likely, it will be up to this Senate parliamentarian (or somebody, if I do not have that exactlyi right, but it is one person) to decide if changing the min wage will be allowed to be included.

    I must say that if this individual rules that it cannot be included, I hope that JohnH, who thinks that changing the min wage is the uber alles issue, does not go bat bananas ballistic over Dems not letting the rest of the package simply die in order to protest this ruling. Changing the min wage can go up as a separate bill, although if GOPs are going to block it, well, Dems need to end the filibuster to get many things they want through the Senate.

    1. pgl

      If McConnell’s games ends up leaving us with no action on the minimum wage, this could be a high priority issue during the 2022 elections. I would love it if McConnell’s hackery led to a Senate nominated by Democrats.

    2. pgl

      “I hope that JohnH, who thinks that changing the min wage is the uber alles issue, does not go bat bananas ballistic over Dems not letting the rest of the package simply die in order to protest this ruling.”

      Give him time as JohnH is generally really, really slow. But once he gets what you note – he will go all bat bananas ballistic. And 100% certain – he will accuse us of being “partisan hacks”.

      1. Barkley Rosser

        Another note on minimum wages, sort of a side comment really, is that in several of the Nordic economies, I think at least both Norway and Sweden, although I stand to be corrected if wrong, there are no minimum wage laws. However, these nations have a majority of their labor forces in unions that have negotiated widespread high wages throughout their economies, indeed higher than we see in the US. Here less than 10% of the private labor force is unionized, and that is not likely to increase dramatically in the near future. So we need higher minimum wages to overcome our deficit in union membership.

        1. pgl

          The paper Menzie just posted is an excellent discussion of the state of theory and evidence re the US debate sprinkled with brief comments with respect to international experience. I’ve only skimmed it so far but please check it out as it looks like a contribution to the literature.

    3. baffling

      the minimum wage is not a covid issue, so it will not be something that gets in the way of passing the rest of the legislation. let it be a gift to republicans to drop it now, and make sure that make a big stink about how they did not raise the minimum wage. because it will be an issue for the midterms. biden can compromise down to between $1.3 and $1.5 triillion and still achieve a solid product to reduce the covid impact. republicans should buy in if they truly want to be bipartisan. otherwise, as McConnell stated before, elections have consequences. republicans need to understand bipartisan does not mean capitulation. they hold little bargaining power other than good will, so they need to understand there will be no equal splitting of the differences in any deal. i don’t think republicans understand this point, yet. so reconciliation it is. eliminating the filibuster is not necessary at this point.

  10. ltr

    Latin American countries have recorded 4 of the 13 highest and 6 of the 24 highest number of coronavirus cases among all countries.  Brazil, Colombia, Argentina, Mexico, Peru and Chile.

    Mexico, with more than 1.8 million cases recorded, has the 4th highest number of cases among Latin American countries and the 13th highest number of cases among all countries.  Peru, with more than 1.1 million cases, has the 5th highest number of cases among Latin American countries and the 18th highest number among all countries.

    Mexico was the 4th among all countries to have recorded more than 100,000 and now more than 150,000 coronavirus deaths.

    February 2, 2021

    Coronavirus   (Deaths per million)

    US   ( 1,378) *

    Brazil   ( 1,061)
    Colombia   ( 1,066)
    Argentina   ( 1,066)
    Mexico   ( 1,226)
    Peru   ( 1,244)

    Chile   ( 966)
    Ecuador   ( 838)
    Bolivia   ( 887)
    Panama   ( 1,216)
    Costa Rica   ( 516)

    * Descending number of cases

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