While lots of us were expressing relief that the slip dowward in the revised economic growth numbers out from the government was not worse than expected, Paul Krugman came in with a reality check. The revised number is so low that it means the unemployment rate will remain elevated...forever.

The problem is that with growth at just 2.8%, we're not really doing anything to take up the slack in the economy. Our under-utilized productive capacity won't come online.

For Krugman, the key measure of economic health is the size of the output gap--which is a measure of the difference between what the economy would be producing if it kept growing at its historical pace and the actual growth (or decline) in the economy. (Incidentally, how come nobody ever talks out an inverse output gap during booms?) Krugman says that at these growth levels we're not really doing anything to close the output gap.

Krugman writes:

When the 3.5% advance number came out, I took to warning people that even if the economy continued to grow at that rate, we wouldn’t see anything like full employment until late in Sarah Palin’s second term. Given the latest number, the date at which we can expect to see a return to full employment is … never.

Actually, the situation may be even grimmer. The odds are good that growth will slow next year as the inventory bounce fades and the stimulus turns from pushing to dragging the economy. Still zombified banks may continue to trap capital and at least some of the business investment from the past year will turn out to be zero-interest rate driven malinvestment.