There was a robust debate inside economics earlier in the recovery period over Okun’s “Law”, the seemingly stable relationship between the unemployment rate and real GDP. The Great Recession was stunningly large in terms of the skyrocketing unemployment rate given that initial estimates for real GDP were bad but not as catastrophic. This was more than a theoretical problem for economists because these were the numbers and correlations that were used to put together at least the size of the ARRA (its composition and format pure politics). Since they couldn’t accurately model the scale of the recession (and economists couldn’t believe, with all the Fed “accommodation” and rescues, that it would ever go that far) that led them to undersize the fiscal “stimulus” – at least in their estimations.

Paul Krugman right from the start of the process complained that it was too small and because of that it wouldn’t work and would risk disproving the whole theory. Thankfully he was right on that count at least in American public opinion about that act. His formulations for “needed” size composition were also traced to Okun’s Law:

The starting point for this discussion [2009 fiscal stimulus] is Okun’s Law, the relationship between changes in real GDP and changes in the unemployment rate. Estimates of the Okun’s Law coefficient range from 2 to 3. I’ll use 2, which is an optimistic estimate for current purposes: it says that you have to raise real GDP by 2 percent from what it would otherwise have been to reduce the unemployment rate 1 percentage point from what it would otherwise have been. Since GDP is roughly $15 trillion, this means that you have to raise GDP by $300 billion per year to reduce unemployment by 1 percentage point.

Revisions to the GDP end of the Great Recession seemingly restored that relationship in Okun’s Law, as the severity was far worse than originally thought; meaning that the unemployment rate seemed the better gauge than the initial run of GDP (which, again, shows that these statistics aren’t what most people think they are; these are stochastic models full of biases and subjectivity). It wasn’t as if there weren’t other data points suggesting the recession was really that bad, as almost anything else was collapsing, from consumer spending to business investment. The unemployment rate held all the corroboration.

However, the debate reignited in the early “recovery” period as the unemployment rate started to improve rather starkly without actual improvement in GDP, leaving many to wonder if Okun’s Law was intellectual destitute yet again. From 2012:

“For a long time, we and most other economists used Okun’s Law as a rule of thumb for deciding what kind of unemployment rate we should expect given a GDP outlook,” Tilton said, calling the recent loss of correlation “really quite striking.”

“We’ve actually had growth almost exactly in line with that over the last couple of years, just below 2½percent,” Tilton said. “That would historically have suggested unemployment would be relatively steady. But, instead, it’s down almost 2 points from the peak in late 2009, early 2010.”