Growth and jobs: the lesson of the Clinton years

Paul Krugman Blog - NYTimes.com:

Just a quick further note on my growth and jobs post. To get a sense of what 3.5% growth does and doesn’t mean, we can look at the Clinton years, viewed as a whole. (I’m using end-1992 to end-2000, but it doesn’t really matter if you vary the start and end dates a bit).

Over that 8-year stretch, real GDP grew at an average annual rate of 3.7%. (Did you know that? My sense is that very few people realize just how good the Clinton-era growth record was). Over the same period, the unemployment rate fell from 7.4% to 3.9%, a 3.5 percentage point decline.

So if we take 3rd quarter growth to be more or less equivalent to average Clinton-era growth, even after 8 years of growth at that rate we’d only expect unemployment to have fallen from the current 9.8% to a still uncomfortably high 6.3%. It would take us around a decade to reach more or less full employment. As I said in my previous post, that’s well into President Palin’s second term.

The implications for Fed policy are also striking. If we use a Taylor rule that suggests zero rates until the unemployment rate reaches the vicinity of 7%, the Fed should stay on hold for around 6 more years.

We need much faster growth.