SCOTT SUMNER II
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.
My question is why go to such an indirect methodology?
Two reasons. First it obfuscates – like Lazear’s WSJ article a while back about tax revs/GDP. Since Conservatism in general, and Libertarianism in particular, are founded on deeply flawed mental constructs rather than the real world, they are forced into these kinds of convolusions to maintain the fantasy. Second, it’s what happens when ideology drives data analysis, rather than data driving to a conclusion.
It’s funny that when writers here talk about GDP, the wingers say – GDP isn’t everything, and there isn’t enough data. Yadda, yadda . . . But when one of their guys talkes about GDP and draws wildly broad conclusions, it’s all “Yup!”
The other thing wingers lack is critical thinking skill.
Other topics talked about here – wealth distribution, jobs data, people in poverty, etc. are ignored, because they don’t fit the Libertarian narrative. This is how they cherry pick.
I don’t even think it conscious dishonesty – though I can’t totally rule that out. I think it’s a blind adherence to an abstract ideology that only allows looking at the world though a specific distorting lens. Read the comments on Krugman’s blog some time. The things wingers accuse him of are pretty enlightening – abut them.
Great post – thanks.
JzB
Spencer
SS does not argue there was a break in trend growth after Reagan. In fact, US growth is trend stationary as long ago Cochrane showed. What changed after Reagan was the volatility of growth, with the standard deviation of growth falling by more than 50%.
Between 1965 and 1982, the US economy was in shambles – rising inflation and bad policy. For example, the DOW was 870 in June 65 and 870 in June 1980!
Are you being willfully obtuse with respect to Sumner’s argument? His contention is not that US GDP growth acclereated after reforms implemented by Reagan and others. His contention is that those reforms allowed the US economy to continue to grow at a similar rate (as your chart slows) while many countries that did not implement reforms saw much slower growth post-1980.
JMMN,
The “shambles” you claim involved a roughly 70% rise in real economic output and a roughly 60% rise in payroll employment. That gain comes despite the crafty choice of a recession as the end-point for the period. Rising inflation? Yes. So President Carter appointed Paul Volcker to cure it. He did. Presidents don’t have all that much to do with monetary policy.
Claims of a stationary trend are rather like claims that the US “always” returns to federal revenue being 19.5% of GDP. Over long periods, that may be true, but spencer has presented the actual data to show that over the period is questiion it is not. Citing some other claim that is contrary to the data presented does not overcome the data.
If you mean to make claims about the economy based on personal assessments and tricks of language, this is probably not the place to do it. We like facts.
I’m not sure the claims vis-a-vis other countries have any validity. Too many incontrolled variables. And what happened other places between 1950 and 1980? Does that information fir Sumner’s narrative?
U.S. GDP/capita change is not at all constant. The appearance that it is results from an optical illusion of presenting long range series data with relatively small percentage changes. The eye follows the curve.
Here is a graph of YoY change. If GDP growth is the only thing you care about, St Ronnie did OK. Clintn did better. the 60’s stand out as a golden age. Ike sucked, and he sucked with a big standard deviation. Both Bush sucked with declining St. Dev.
http://jazzbumpa.blogspot.com/2010/05/real-gdp-per-capita-since-1950.html
Data from BEA, constant 2005 $.
Cheers!
JzB
Sumner managed to find a metric by which the US can be claimed to have done “well” under Reagan. It is not, however, a metric by which we often see performance judged. Where we see it, in a slightly altered form, is among misbehaving children. When little Ronnie is caught behaving badly, he points at little Yasuhiro and little Helmut and says “they behaved worse”.
Do we have reason to prefer comparisons with other countries to comparisons to other periods in the US? I’m sure I could think of some. But I’m also sure I could find other periods in which the US outperformed other countries. Even if we let Sumner’s much diminished metric stand – and it is much diminished against the standard Reaganite claim that things were better under Reagan’s policies than before or since – we might want to see if it holds up. Is the post-Reagan era the only modern period in which the US has outperformed other developed countries in the way Sumner identifies for his analysis. I’m thinking not.
MBP,
Are you implying that without monetarism, printing money freely, and without US G borrowing money from the wealthy because Reagan lowered their marginal tax rate to 30%, the world would have fallen into the Malthusian period of no resources, no food for more people and no technological advances?
Are you saying that the industrialization arcane monetarism incident to India, Vietnam, Singapore and China had no impact on world output and price levels?
Just wondering.
The GDP has been growing just fine. The problem is that one hour of work gets you less of your share of the GDP than it used to. Granted, work probably never paid better than during the Great Depression, hence “nice work if you can get it”. Still, there was a big downward deviation starting in the early 70s. I actually ran some numbers and tried to figure out what happened. My guesswork is at http://www.kaleberg.com/househours/gdpshare.html
we have reason to prefer comparisons with other countries to comparisons to other periods in the US? I’m sure I could think of some. But I’m also sure I could find other periods in which the US outperformed other countries. Louis “>Vuitton
JMMN,
Don’t know if you’ll see this, but it is follow-up to your RGE post regarding post-recession bounce (or not) back to potential GDP. I used BEA numbers released on 7/30 and linear fit to 2006-2007 annualized Real GDP (2005$) to establish a pre-recession trend, then compared Real GDP to trend. We are leveling off at -5% relative to the Trend.