Thursday, February 5, 2009

Odd Claims

Well, if true sales (GDP) are really 7 to 10 per cent lower than reported, 7 to 10 per cent of the workers must be cut...

Excerpted from a globe column by Avner Mandelman, who then takes this to mean we should expect 13% unemployment in the near future.

Is there such a law? Of course not. The postwar evidence suggests that 1% of underemployment means 2.5% less GDP, a stylized fact termed Okun's Law, which Krugman posts about twice a day.

So even if we grant the guy the upper bound of his numbers and the generous end of the Okun observation, you wouldn't expect more than 5% NAIRU + [10 x 2 = 5%] = 10% US unemployment. But overstating GDP by 10% would probably be twice of what I could be persuaded to believe (I specifically take issue with his methodology of reducing the world to a company by arguing governments provide much more stability than boards of directors, whether or not that imposes longer term costs is another issue) and there are large swaths of the blogosphere who have yet to acknowledge in any way, shape or form that potential GDP might have suffered from financial and housing shenanigans.

Then again, it's already 7.2%, and after tomorrow's numbers, 10% might not be that far away.

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