Krugman on Unemployment and GDP: Huh?

I didn't grok Paul Krugman completely Saturday morning. He writes (Growth and unemployment):

What you see is that unemployment tends to fall when growth is high, fall rise when it’s low or negative. You also see that growth has to be fairly fast — more than 2 percent [per year] — just to keep the unemployment rate from rising. Why? Well, productivity is rising, so that you can produce any given level of output with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, so you need positive employment growth just to keep unemployment from rising.

That’s how you can have a technical recovery that feels like a recession: real GDP may be rising, but if it doesn’t rise at a sufficiently high rate, unemployment keeps going up....

Has the rise in unemployment been more than we should have expected, given the slump in GDP? Looking at the data, I don’t think there’s a strong case — not so much because of the numerical exercise I did in the earlier post, but because this recession is just completely on a different scale from anything we’ve seen for a long, long time. It’s hard to know what we should have expected.

And one last point: when I say that the rise in unemployment makes sense, I mean that it makes sense given the depth of the recession. It is, of course, completely crazy and disastrous from a larger point of view.

I get the point that we are at the edge of the scatter right now, and hence it is "hard to know what we should have expected." But we did expect the relationship to be roughly linear--and it does look like we are high on the change-in-unemployment by an amount that is certainly economically if not statistically significant.

Should we have expected a nonlinearity in Okun's Law to emerge at the left end? I know that I didn't. Would I have if I were not a bear of very little brain? I'll have to think about this for a while...

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Update: Gah! The horizontal axis is not the 8 quarter growth in GDP but the average annual growth rate over those 8 quarters...

Comments

[Glen L.:]

Krugman says it's hard to know what we should have expected. So much for the value of a Nobel Prize in economics. If he wasn't a steroid-enhanced Keynesian he would have expected the recession to be just as bad as it is, but he didn't. He pushed hard for the crazy stimulus packages, and pretty much got what he wanted, although he moans that it may have been too little, too late. Too little to kick the can down the road a couple more years and protect his undeserved reputation and his NY Times hack status. Oh, well, Paul, soon the Gray Lady will assume room temperature, but don't worry - Goldmans Sachs is hiring. So's the federal government.

Aug 02 11:00 AM

[pk de cville:]

To help:

"What you see is that unemployment tends to fall when growth is high, fall rise when it’s low or negative." is actually

"What you see is that unemployment tends to fall when growth is high, rise when it’s low or negative." (dropping the 2nd 'fall')

Aug 02 01:15 PM

[firstThings...:]

You have every right to disagree with Krugman despite his Nobel Prize. A Nobel Prize winner can be horribly wrong, as we saw with Milton Friedman and the current disaster, thanks to Friedman's acolytes and corporatist economics.

On the other hand, Krugman has been consistently right so far, so I think I'll believe him.


On Aug 02 11:00 AM Glen L. wrote:

> Krugman says it's hard to know what we should have expected. So
> much for the value of a Nobel Prize in economics. If he wasn't a
> steroid-enhanced Keynesian he would have expected the recession to
> be just as bad as it is, but he didn't. He pushed hard for the crazy
> stimulus packages, and pretty much got what he wanted, although he
> moans that it may have been too little, too late. Too little to
> kick the can down the road a couple more years and protect his undeserved
> reputation and his NY Times hack status. Oh, well, Paul, soon the
> Gray Lady will assume room temperature, but don't worry - Goldmans
> Sachs is hiring. So's the federal government.

Aug 02 08:38 PM

[Gregman2:]

The bottomline is...what are our national priorities?;-)

Aug 02 10:07 PM

[TCK:]

Regarding Krugman;

I am not a trained economist, but I have as much right to guess as he does !

Aug 03 07:44 AM

[SivBum:]

Right,

You have as much right as a 4th grader to guess at the outcome of an high energy physics experiment at Lawrence Livermore Lab. LOL!


On Aug 03 07:44 AM TCK wrote:

> Regarding Krugman;
>
> I am not a trained economist, but I have as much right to guess as
> he does !

Aug 03 01:06 PM