Another Look at Keynesianism and the Great Stagnation
by Mike Kimel
Another Look at Keynesianism and the Great Stagnation
Cross-posted at the Presimetrics blog
Last week I had a post noting that the US government followed more or less naive Keynesian policies (whether on purpose or not I cannot say) from the early 1930s to the late 1960s. The post also notes that what Tyler Cowen calls The Great Stagnation, a period of relatively slow economic growth, began just about when the government moved from naive Keynesian policies to a regime that could mostly be described as “all deficits all the time.”
In this post, I’d like to present a couple of graphs that are pretty self-explanatory. The data in the graphs comes from the BEA’s NIPA Table 1.1.5 The black line runs from 1929 to 1967, and the gray line from 1968 to the present.
I’ll be coming back to this topic in future posts, but I’d like to make a few quick comments:
1. The Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector’s share of the economy stopped shrinking and began growing, and where the government’s role in the economy stopped growing and started shrinking.
2. Even if you assume the growth of the private sector or the shrinking of the government isn’t causing or contributing to the Great Stagnation, the data still leaves libertarian and conservative economic views at a loss. After all – shouldn’t growth increase as the private sector becomes more important and the government shrinks in size?
3. Bear in mind that marginal tax rates – reduced in 1964 and then reduced again multiple times since then – were lower during the Great Stagnation period than they had been since the 1930s. Needless to say, this is yet another fact that makes the data inconsistent with libertarian and conservative economic theory.
4. As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about.
Considering what the government spent borrowed money on (and in the past 15 or so years a lot of the borrowing, building trust funds was not counted in the “deficit), there is a line of reasoning that military spending is a net drag on the economy.
Particularly the military spending on R&D, Procurment and operations and maintenance, in 2011 these will total about $530B which should be used better elsewhere in the economy.
This is Keynesian but it reduces productivity in the long run as half a trillion a year goes to a socialized, inept industry which pays too much and does nothing for consumers nor future production. Except in inefficient industries that cost too much.
The military industrial complex has widespread micro economic drags.
It may warp any discussion of libertarian or conservative economics against Keynesian stuff.
But for externalities and manipulation of the government by unwarranted influences the Laffer curve may have worked.
Well Lord knows (and several commenters here as well) that I am an economic moron. That said I would put that sharp reduction in personal consumption to investment between 1940 and 1944 as due to combination of goods rationing and immense an sustained effort to get the population at large to buy War an Victory Bonds.
I don’t know if I am even smart enough to understand Mike’s argument here, but absent the combination of Rosie the Riveters’ massive contribution to labor participation and war time rationing that line would be pretty flat,with the post war peaks on consumption and private sector investment fully explainable by the removal of war time constraints.
I don’t see how those graphs have any other explanatory role vis a vis either theory. Pent up income hit the economy after the war as Rosie and Johnny stated coupling like bunnies in part fueled by the GI bill and hen flattened to trend.
The question at hand is why did the trend reverse in 1968.
Up until about 12 years ago I never followed economics because I thought you needed a Ph.D. to make a contribution — like any other science — I thought it was all about complex equations, the kind of things Republicans always talk (usually mistakenly) about. If you will pardon my cabdriver kibitz, you guys seem lost in that number maze.
What ultimately governs the speed of economic growth (or should barring the current type financial traps) is of course MATURING technologies. Jet engines take 5% of the maintenance of piston engines and do a lot more work. Copying machines (yes copying machines — at my first job in 1961 there was a typing pool as packed as a Catholic school classroom) put maybe millions of typists out of work (good copiers came in only by mid 1970s).
These days my reading is about the financial trap of the European debtor counties and the decades of austerity their working populations may face to pay off the debts.
American workers have already suffered decades of austerity. Today’s median wage (the average person’s wage) is a mere 20% higher than 1968’s even though average income has doubled. This has been self-imposed in a backwards sort of way. Americans lack labor unions in the only form that successfully wards off the race to the bottom: legally mandated sector wide labor agreements — the set up that is standard in the better paid OECD world.
This lack also deprives the average person of equal power in the political process. Unions supply political organization and funding along with the majority of votes. Sector wide would have meant no Republicans (George Bush II) giving (1) $4 trillion of tax cuts to the rich which went to (2) deregulated banks which (3) created the worst kind of bubble, the housing bubble.
Wake up and smell the social and political shit. 🙂
Correct… WW2 is a blip. (I will probably have a further post on these graphs, which would include commentary on WW2 but not immediately.) The issue I’m discussing is something else… Tyler Cowen tells us that growth from about 1950 to about 1970 was faster than from growth after that (the Great Stagnation). And we know that growth from 1932 to 1945 was faster than growth than 1950 – 1970. So what changed between periods of growth and periods of non-growth? The trends. (I’m a bit unhappy about that – I’d prefer it if the absolute level of X or Y or Z mattered and not the trend because trends can’t go on forever.)
However… the trends in gov’t / GDP and private sector / GDP do not match the libertarian story. How many times have you heard them say “increase the size of government and the economy grows faster, decrease the size of the government and the economy grows slower?” Or the private sector is less efficient at producing growth than the public sector?
Mike, you say that the Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector’s share of the economy stopped shrinking and began growing, and where the government’s role in the economy stopped growing and started shrinking.
I haven’t read Cowen’s book but I’ve read enough comments about it from the likes of David Brooks to conclude that conservatives are touting its arguments as the Great New Conservative Anti-Keynesian Hope.
But I’m not sure why. It sounds to me from what I’ve read about it, including in Brooks’ column, that it provides support FOR, rather than evidence against, Keynesian policies.
Quibble: …and the government shrinks in SHARE… not size. Your point still makes sense, but when you want to make a controversial (to some people) argument, you can avoid distractions by stitching up all the easy objections before unveiling the argument.
Bunnies or hens, which is it?
What’s the 101 explanation for faster growth when government spending is a greater share of GDP, slower growth when government’s share is cut back? The 101 explanation is that government provision of goods and services has not yet reached the point at which marginal cost is as high as marginal product. Since there is no “market” for government goods and services in the same sense as private goods and services, it is possible for the marginal this not to equal the marginal that.
The argument that non-stupid small government types make is that government is oversupplied. That’s the public choice claim, probably a wee bit oversimplified. The public choice argument doesn’t require measurement, though. The public choice argument is by assumption – they have a view of how government works, and that view ends up with government providing goods and services on too large a scale, on a scalel at which the marginal cost is higher than the marginal benefit.
Your (Mike’s) presentation of the data suggests that the public choice assumption is wrong, at least in the US. On the strength of this evidence, we should suspect that we undersupply government goods and services.
Most people don’t look at data. They have a narrative they “know” in their hearts is true, and if a new story fits that narrative, by definition its true too. None of them seem to have the intellectual curiosity to check whether the building blocks of their narrative are consistent with the data, and they simply aren’t capable of accepting it when you point out that the data contradicts their facts. Tyler Cowen has seen both of these posts.
When I revisit this, I will be more precise.
Yes… in my spreadsheet I have graphs that also look at defense v. nondefense spending. Too much for one post. Maybe that is the subject of another post all to itself. Maybe also have to look at a finer granularity there too.
the long postwar expansionary phase ‘reversed’ during the later 1960s-early 1970s since the average rate of profit in thr u.s. began falling from moreless 1966-69.
the question then is why did the profit rate do this – some blame real wages which had been rising for most of the period, others consider a broader picture including the rise in productivity in germany and japan + an overaccumulation of capital in the u.s. + sectoral disproportionalities exacerbated by war spending + episodic currency crises from early 1960s [something robert triffin brought up in, i believve, 1958 ++……….
kharris: “On the strength of this evidence, we should suspect that we undersupply government goods and services.”