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At Modeled Behavior , Karl Smith shares two graphs. He asks us to look at what happened to the output gap after 1983: ...and then at the output gap for now: ..and he asks us to consider whether we could see a rapid recovery over the next year. Smith says it si possible. Not likely, but possible. Read How Fast, Recovery here . (Hat tip, Mark Thoma )

The first decade of the twenty-first century brought declining incomes for American workers. And it doesn't look like we'll see a rebound any time soon. Economists surveyed for the Wall Street Journal 's forecasting survey predict that the US median income, adjusted for inflation, will not reach 2000 levels again until at least 2021. Phil Izzo reports on the findings in this WSJ video:

The Federal Reserve decided yesterday to leave the federal funds target rate unchanged at 0-0.25%, citing the slowness of the economy's growth and stable longer term inflation expectations . The Fed will also sell some short term Treasuries, and in return buy some longer term Treasuries. While there were calls for more action from the Fed, Tim Duy called the Fed' stance "bold." Bottom Line: I think Fed official believe they are being bold; I see them as continuing to ease policy in 25bp increments. Expect that to continue. Assuming the economy fails to regain momentum, the Fed will follow up with additional action – QE3 will be the next stop. Ignore the dissents; they are background noise. Don’t expect miracles; expect small moves, the equivalent of 15bp here, 25bp there. The real leverage could potentially come from fiscal policy leveraging the easy monetary policy. Print the money and spend it. Open up the refinancing channel. Overall, make the objective of national economic policy simply be to decisively move us off the zero bound. Not deficits, not the dual mandate, just commit to pulling us off the bottom. Read Duy's Fed Watch response to the FOMC meeting here . For more analysis of the announcement and possible response today on Wall Street and in Washington, here's the Wall Street Journal's Evan Newmark , Jon Hilsenrath , and Thorold Barker :

In a New York Times op-ed, Paul Volcker expresses some concern that members of the Federal Reserv's Open Market Committee are starting to find the prospects of "a little inflation" tempting. The thinking that concerns Volcker is that 4 or 5% inflation might have a stimulating effect for the economy. Not so, says Volcker: My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on. What we know, or should know, from the past is that once inflation becomes anticipated and ingrained — as it eventually would — then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability,” but invokes inflation as a policy, it becomes very difficult to eliminate. It is precisely the common experience with this inflation dynamic that has led central banks around the world to place prime importance on price stability. They do so not at the expense of a strong productive economy. They do it because experience confirms that price stability — and the expectation of that stability — is a key element in keeping interest rates low and sustaining a strong, expanding, fully employed economy. Read A Little Inflation Can Be a Dangerous Thing here .

At the Economix blog, Laura D’Andrea Tyson says that as some of the world's largest economies try to avoid a double-dip recession, it is important for policy makers to attack the jobs crisis. And the only way to make progress in fighting the crisis, she argues, is to correctly diagnose the cause: As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.” And the majority of economists agree on this diagnosis. They also agree that the recovery from a balance-sheet recession can be agonizingly long, with significantly slower growth and a significantly higher unemployment rate for at least a decade. Recent data indicate that the United States is on such a course, and many economists are now drawing comparisons between it and Japan during the two “lost decades” following Japan’s 1989-90 financial crisis and ensuing balance-sheet recession. A recent study by the economist Robert Gordon confirmed that the shortfall in private-sector demand, especially the demand for consumer services, residential and commercial construction, and consumer durables, is the primary cause of shortfalls in production and jobs. Read Recovering From a Balance-Sheet Recession here .

Is the current economic bleakness reminding you of 2008? If it is, you are not alone. But the Wall Street Journal 's Francesco Guerrera warns not to get caught up in that thinking. "This time is different," he says. For starters, the root cause of the problems today come from a different place: The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector's breakdown that caused the recession. The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities. That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators. Read Why This Crisis Differs From the 2008 Version here .

No matter what the prevailing discussion is in Washington, job creation remains perhaps the biggest challenge for policymakers. And many of the most ardent small business supporters argue that their sector is the real engine of job creation in the US. So jump-starting that engine would certainly be welcome. But it may be that small businesses started to change in size before the recession. That is, that they became smaller and had fewer employees. A new Kaufman Foundation report highlights this issue, and makes the case that a boost in small business job creation is highly dependent on the number of small businesses, and not so much on current small businesses hiring more people. Recent Census Bureau research has pointed to one factor that is contributing to this slowdown in job creation—shrinking job creation in startups. As shown in Figure 1, startups created an average of 3.5 percent of total U.S. jobs annually in the 1980s, but in the 2000s contributed only 2.6 percent of total U.S. jobs. While diminished in number, these jobs still were the difference between positive and negative overall net job growth in the United States. Media and academic commentators who bemoan America’s unusually slow rate of job creation after the 2007–2009 recession are missing what we believe is a longer-term trend that began earlier in the decade and might best be called a slow jobs “leak.” In the pages that follow, we draw upon newly available data to track businesses over time and dig deeper into the health of U.S. startups. We examine young companies’ size at birth, jobs created, and survival patterns to draw inferences about the health of emerging companies in the United States. The patterns we find among young businesses show that recent U.S. startups are performing much worse than prior cohorts in terms of job creation. Conventional wisdom about job growth tends to focus solely on the jobs that are being created at existing (typically big) companies. But as a wealth of recent research has shown,6 new businesses are vital contributors to a healthy jobs market. Indeed, we know that, until the Great Recession, new firms in the United States generated on average about 3 million new jobs every year. While these firms typically follow a quick up-or-out pattern of success or failure, our analysis highlights for further scrutiny of some additional and, we believe, significant facts about the jobs actually created by new businesses. Read Starting Smaller; Staying Smaller: America’s Slow Leak in Job Creation here .

At Econbrowser , James Hamilton lays out the case for the economy to stabilize somewhat in the second half of 2011. He can't quite bring himself to say that it will get better, instead saying that he doesn't "expect things to get a whole lot worse." A major culprit for the slowing recovery has been oil prices--and specifically the impact of oil prices on new car sales. But Hamilton expects car sales to pick up as retail gas prices come down. He shares this look at the trend in car sales: Hamilton argues that the recent trouble for auto sales were very different from the back in 2008. Read his analysis here .