Why doesn't it feel like an economic recovery?

Today's The Washington Post features "Why it doesn't feel like a recovery," a revealing graph accompanied by a short article. They are presented interactively here.

Here's the crucial graph itself:



You'll need to view the online presentation for full details. Here's a summary:

Our economy's "size" is given by its gross domestic product: how much valuable "stuff" gets produced by Americans each year. The potential GDP grows as the potential size of the workforce does. Meanwhile, improved techniques of production are usually expected to increase the "productivity" of workers, so they can make ever more "stuff" per hour on the job than they otherwise could. That's why there is an almost straight diagonal line in the graph that steadily ascends as the years roll by, reflecting a GDP that potentially grows at a nearly constant rate.

But the actual GDP is currently under — less than — that potential GDP. That's the area shown in red on the graph.

Actual GDP can sometimes exceed the line shown as potential GDP, during short, unsustainable bursts of economic activity. The areas shown in blue — the bigger of the two that are shown comes around the years 2000-2001 — reflect that.

The key point is that the vast shortfall between actual and potential GDP that we see today is what is wrong with the economy. Too many people without jobs, too much industrial machinery idle, too many office buildings under full capacity — it all adds up to a woefully underperforming economy.

This is so even though actual GDP stopped dropping and began heading upward in the middle of last year, 2009. The graph shows that fact ... and it is what economists mean when they say that the recession officially ended then. We are no longer in recession because we have positive GDP growth now; that's all that means. It does not mean the economy is in good shape.

What would it take to get the economy back to the level where actual GDP matches potential GDP, so that everyone who is not simply "between jobs" actually has a job, factories are all humming, office buildings are full, retail stores are not empty, etc.?

As the graph shows, we can get back to that point as soon as 2012 — in time for the next presidential election — if only actual GDP could rise at the rate of 6 percent per year between now and then. 6 percent growth would so far outstrip the more modest expected rise in potential GDP, that all but the roughly 5 percent of workers who are typically "between jobs" at any given moment are actually working.

However, if actual GDP growth takes place at a more modest rate of 3 percent a year, it will take us until 2020 to squeeze all the red out of the graph.

And it gets worse. If the rate of actual GDP growth tops out at only 2 percent a year into the foreseeable future, we will never squeeze all the red out. In fact, in that scenario the unemployment rate, which is now at an unacceptable 9.7 percent, would rise to fully 11.9 percent by 2020 if GDP grows at a scant 2 percent between now and that year.

In short, this graph gives us all valuable insight into why words like "the recession ended in mid-2009" are meaningless from a practical — and political — perspective today.