As a Result of the Lesser Depression, 7.5% of America’s Long-Run Prosperity Has Disappeared, Apparently Forever

That is what the CBO’s revisions of its potential output forecasts since 2007 tell us:

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Nothing on the supply side has happened to make the long-run outlook worse. And yet it is, much, much, much worse than it was only seven short years ago.

Figuring out how to calculate a present-value equivalent of the long-run growth path of the U.S. economy poses many conceptual puzzles, of which one is that the interest rate at which the U.S. government can borrow appears to be less than the growth rate of the economy, so however far out you look it always looks as if the bulk of the present value today of wealth still lies in the future.

Still, if you want to make the (unjustified) assumption that the right discount rate to use is the 5% real rate of the average stock market earnings yield, the present and future productive wealth of the United States today is then worth $335 trillion–and we have lost $27 trillion in the future and $8 trillion in the past as a result of the Lesser Depression.

And a lower rate-of-discount produces larger numbers…

Cf: CBO Economic Growth Is Projected to Be Solid in the Near Term, but Weakness in the Labor Market Will Probably Persist

February 28, 2014

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