I think it is plausible that such a line would be lower than the CBO potential line in Irwin's picture, and thus that the current output gap even by a production function metric would be smaller than the one in the picture.
Bullard essentially claimed that before the latest recession we were already beyond potential GDP. Now I’m not buying this argument and I applaud The Money Illusion for an excellent discussion that I wish I had penned.
Now admitting that estimating potential GDP is hard but also admitting that no one of us necessarily has a better series than the one put forth by CBO, I decided to look at the annualized growth rates in potential output implied by their series by decade. For the 1950’s we had 3.68% growth per year with the growth rate for the 1960’s being 4.2%. And yes growth in the 1970’s slowed to 3.25%.
Of course, the Reagan years changed all that and we had potential GDP growing at a 3.03% per year in the 1980’s. Oh wait – I thought there was supposed to be some supply-side miracle. For those roaring 1990’s, CBO is claiming that potential GDP grew by 3.15% per year.
But to my main point – the CBO estimates of potential output suggest annualized growth of only 2.36% during the alleged Bush boom. And Mr. Bullard thinks CBO was overestimating potential GDP? And the Republican recipe for faster GDP growth is a return to the policies of Reagan and George, Jr.? OK!