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There are several ways we can look at the current state of the U.S. economy. A few macroeconomists say, and their supporters affirm, that we are near full employment and the jobless rate is around 5%. Another group, who are not macroeconomists but recognize the importance of the jobless rate, say that unemployment has not yet declined to a rate below 6%, that we are clearly not near full employment, and that the jobless rate is probably 6% or more. A third group agrees with the second group about employment and disagrees with them about the rate. These conflicting views about the state of the economy, and the policy implications flowing from them, have not been presented in a single place.
The issues at hand are complex, requiring deep understanding of the state of the economy, as well as our best economic models. The debate is so politically charged that it will be very difficult for unbiased minds to reach a resolution. And the fog of opinion is thick.
Let’s see if we can use a sort of 3-D computer modeling, similar to the ones used in physics, to project ourselves into the future.
We can take the current situation and project two possible scenarios. The first, the best-case scenario, is that the unemployment rate falls to below 5% sometime in 2016. The second, less-preferred scenario, is that the unemployment rate remains above 5% and does not decline below 6%.
In this scenario, the other economic variables do not change. In particular, we assume the price level remains stable (a sign of a well-functioning economy), and the growth of real GDP remains relatively steady. All this is consistent with a good economy and low unemployment.
Based on the economic models discussed in the previous two pages, we need to examine the economy in the 2016 0b46394aab