8 + 2 = 10

Graph #1 Source: CBO PDF February 2013

Graph #2 Source: Wikipedia (CBO 2009)

Pretty easy to find graphs that looks like these, graphs that show GDP climbing back to its potential and closing the gap.

You know why the graphs show the gap closing? It's because the people who come up with the numbers just assume the gap will close within ten years! As a CBO background paper observes:

CBO assumes that any gap between actual GDP and potential GDP that remains at the end of the short-term (two-year) forecast will close during the following eight years.

Unfortunately, while the graphs show GDP recovering, there are people who say that GDP is *NOT* going to climb back up to potential. Jim Bullard says it:

I want to now turn to argue that the large output gap view may be conceptually inappropriate in the current situation. We may do better to replace it with the notion of a permanent, one-time shock to wealth...

The wealth shock view puts a different expectation in play. The negative wealth shock lowers consumption and output. But after the recession ends, the economy simply grows from that point at an ordinary rate, neither faster nor slower than in ordinary times. It is more like an earthquake which has left one part of the land higher than another part. There is no expectation of a “bounce back” to a higher level of output after the recession ends. This is closer to what has actually happened since mid-2009. Output has grown at a moderate rate, but not a rapid rate, since the recession ended.

Thomas Hoenig seems to have said it even before Bullard.

And Scott Sumner is clearing his throat:

In 2009 I advocated going all the way back to the old trend line. I currently favor going about 1/3 of the way back. If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are.

Stranger than fiction, people who are not saying what Bullard says, people like William Gavin and David Altig, are showing graphs where instead of GDP moving up to trend, the trend of potential output keeps getting lower!

Those graphs that show GDP will recover soon, well, "soon" is always just a little out of reach, and even the people who present those graphs seem not to believe them.