I decided to look at the Scott Sumner blog post that Mike wrote a couple of days ago and again today.
The objective of the Sumner post was to disagree with Paul Krugman and others about a break in trend in US economic growth because of the Reagan revolution. But rather than look directly at the US data he undertook a complex, convoluted approach that indirectly tried to demonstrate that there had been a break in US growth because of the reforms around 1980.
My question is why go to such an indirect methodology? Why not just look directly at the very good US data? So that is what I have done.
Since the end of WW II the trend rate of growth of US per capita real GDP growth has been 2.1%– calculated as the exponential growth rate from 1945 to 2009. This chart shows the level of US real per capita growth in the post WW II era compared to the 2.1% growth trend.
When you look at this chart it is rather obvious that there was no break in the growth of average US living standards around 1980. If you really want to break the post WW II experience into sub periods, the best performance of the growth in real per capita GDP actually appears to be from the late 1950s to the late 1970s. But that is really just as much, if not more, of an economic trough to economic peak comparison that tends to overstate growth just as the comparison from the early 1980s to 1990 appears to be above average when it is really just another biased trough to peak comparison.
So when you look at the actual US data it does not appear that there was an improvement in the US economic performance after 1980. The convoluted Scott Sumner comparisons are just an attempt to fool readers. OK, Scott attacks Mike on his questioning the data that Scott had used. So I’ll just ask Scott why he does not use the very good US data to demonstrate that there was a break in US economic performance around 1980?
While I am on the subject of Libertarian economic analysis I thought I would also look at another claim by Libertarians that the post WW II era of the US mixed economy with big government was harmful to US economic performance. As of about 1850, all of the major elements of modern, free market, capitalist economies were in place with the limited liability corporation, professional management and large scale bond and stock markets where corporation could raise capital. Consequently, it would seem to be a fair comparison to compare the performance of the US economy from 1850 to 1950 to that of the post WW II era. The biggest difference in the two eras was the size of the federal government. For the most part it was about 2% of GDP prior to the Great Depression and it has been around 20%
of GDP since WW II. Moreover, government transfer payments were insignificant prior to the Great Depression of the 1930s.
So how did the economy perform from 1850 to 1950 with essentially modern financial corporations, free market capitalism and small government compared to the post WW II era with large scale government. It seems that from 1850 to 1950 that trend real per capita GDP growth was some 1.6%, or significantly less than the 2.1% trend in the more recent era of big government. Moreover, the big swings in the 1930-40s era did not impact this comparison as the 1850 to 1929 trend growth rate of per capita real GDP was also 1.6%. Just as an aside, from 1790 to 1850 trend per capita real GDP growth was about 1.0%.
Just a couple of quick observations. Libertarians like to point to the 1920s as a great era of growth. Superficially, if you just look at that era one could reach that conclusion. But look what preceded the 1920s. From 1907 to the early 1920s real per capita GDP growth stagnated and did not really break above the 1907 peak until the mid-1920s. That is what the green dashed line on the chart shows. Given the well over a decade of stagnate real per capita GDP growth preceding the 1920s boom, it is very easy to make the argument that the 1920s was just a catch-up phase from the poor economic performance over the preceding era.
While I’m down on Libertarians, what about the recent argument by Bryan Caplan of George Mason University, who blogs at econlog.org. He recently argued that the decade of 1870’s was the peak for Libertarian freedom and economics. Maybe, but I wonder if he is even aware that economic historians label the 1870’s as the “Long Depression”. I find it really amusing that he so proud of what others call a depression — typical Libertarian. Since I am already banned from that web site for pointing out factual problems with their analysis I guess this comment will not make much difference.