The upside down economy: The Hare chases the Fox

Fox & Hare_0

According to Danny Blanchflower, the US economy is back to normal because “there is no inflation and unemployment is 4 percentage points below the start level”.

It appears Janet Yellen & Associates think the same. According to Yellen:

“We believe we have seen substantial improvement in labor market conditions and while things may be uneven across regions of the country, and different industrial sectors, we see an economy that is on the path of sustainable improvement”.

Normally, it is the fox (actual output) that chases the hare (potential output). This is illustrated in the chart below, which shows how the “fox” usually pursues the “hare”.

Fox & Hare_1

Over the last eight years, however, it appears the “fox” got tired, allowing the hare to “run away”. But that cannot be, so the “fable writers” (the CBO) has given the story a twist, deciding that in the “new world” it is the hare that will pursue the “tired-out” fox!

Fox & Hare_2

DB and Yellen & Associates are correct! The economy is (almost) back to normal, a state in which actual output is very close to “potential output”.

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