OK, that title is just fun to write.

The econo-blogo-sphere has been lit up between two macroeconomic heavyweights arguing about the forecasts for GDP growth. To catch you up:

• The president’s Council of Economic Advisors projects substantial GDP growth to follow the contraction, based on the logical that the deeper the recession, the more significant the recovery – as much as 15% GDP growth by 2013.
• Gregory Mankiw expresses doubt with this view – mostly because we don’t understand when the economy will bottom out. Also, something about unit root hypothesis is discussed, but I am not smart enough to figure out what it means.
• Paul Krugman suggests that the unit root hypothesis may be the root of some kind of evil, and retorts with Okun’s Law, a devastating witty retort involving the relationship between GDP and unemployment and Mankiw’s mother.
• Mankiw wants to bet Krugman some of his Nobel prize earnings as well as a night with Krugman’s mom that real GDP of 2013 will not be 15.6% higher than 2008 real GDP

I’m siding with Mankiw on this one. Not that I have a single intelligent thing to add regarding the relative predictive capability of Okun’s Law – I’m afraid I am working just with vague numbers and common sense.

As I have pointed out numberous times in this space over the last several weeks, our economic growth has been juiced entirely by debt in the last few years – a situation without precedent in the modern history of macroeconomic theory. Perhaps if this recession/depression was simply part of the natural business cycle, I would trust in the idea that the temporary unemployment would ultimately lead to pent-up demand, lots of cheap assets and talent, and ultimately a mid-term boost in economic productivity.

Here, we won’t allow assets to collapse in price or let the institutions fail, because to do so would supposedly result in chaos too great for the social fabric to withstand. We’re in debt as people, companies, and governments. As such, the GDP we are bleeding off is a correction back to true productivity gains. But first, the pain.

I would be very nervous to suggest to our clients that GDP would be bounding up 15.8% in the next few years just because it’s wretched now.

Mankiw WINS.