A Different Look at GDP and Inflation

At Illusion of Prosperity, Stagflationary Mark posted this scatter-graph of quarterly GDP YoY growth and CPI data from Q1, 1948 through Q4, 2011.  Each point represents the differences from the medians of each data set for each of the variables, respectively.  This gives you a picture of time spent above and below what might be considered normal performance.

I wondered how this would look if each point were identified by presidential administration, and if this would suggest any particular narrative.  So I redid the graph, data from FRED, using mean instead of median as the determinant.  It is presented here as Graph 1, with each data point (256 total) color-coded by presidential party; red for Republicans, blue for Democrats.  The calendar quarter of each president’s inauguration is allotted to the previous administration.

I’ve labeled the quadrants as follows, and indicated the frequency of data points populating each quadrant.

Here are the Mean and Standard Deviation values.

 

The GDP data has something close to a normal distribution, with approximate symmetry around the mean. The CPI data does not. For CPI, the highest frequency is 2 percentage points below the mean, and there is a long tail on the high side, so the distribution looks more like a Poisson type.

I’ve broken out presidential administrations, 3 or 4 to a graph, to avoid excessive clutter.  Graph 2 shows the administrations of Truman (light blue), Eisenhower (red), and Kennedy-Johnson (dark blue.)

Results during the Truman administration were erratic, with both inflation and deflation occurring, and GDP growth widely variable as the nation made post WW II adjustments, and several million G.I.’s reentered the work force.  Ike was an inflation hawk, and one of only two presidents to achieve below average inflation in every quarter of his administration.  (Take your guess now as to who the other might be.  All will be revealed in due time.)  Still, the road was bumpy, with GDP growth highly variable, and two rather severe recessions during his term.  The Kennedy-Johnson administration enjoyed superior economic performance and relatively low inflation, with only 6 quarters of below average GDP growth, and only five quarters of above average inflation during the entire 8 years.  This was one of only two administrations to avoid recession for an entire 8-year term.

Graph 3 shows the Nixon-Ford (orange), Carter (blue), and Reagan (red) administrations.

Here we find three increasingly extreme excursions into stagflationary territory, two under Nixon-Ford (remember Whip Inflation Now buttons?) and one under Carter. The first and mildest was in 1970, the second in 1974-5, and the last, in 1979-80 probably played a part in holding Carter to a single term.  Inflation far above average plagued both of those administrations.  Each spent time above and below average in GDP growth with term averages very close to the grand average.  However, Carter’s last two years were consistently below average, and coupled with high inflation, earning him his moribund reputation.  Early in Reagan’s first term, Volker finished slaying the inflation dragon.  But the cost was high in terms of depressed GDP growth, and during that time Reagan was extremely unpopular.  But, as the economy recovered, so did his reputation, and he is now remembered, for good or for ill, as one of America’s most beloved presidents.  The remainder of his presidency resided along at least one of the two average lines, including four consecutive quarters of exceptional GDP growth coupled with only slightly above average inflation, spanning 1983-4.

Graph 4 shows the Bush Sr. (orange), Clinton (light blue), Bush Jr.(red), and Obama (dark blue) administrations.

During the Bush Sr. administration, 11 of 16 quarters had below average GDP growth, 10 quarters had above average inflation, 8 of these quarters had both.  Clinton’s term began and ended with below average GDP growth, but during his 8 years here were only 9 below average quarters.  Four of them occurred in sequence from Q2, 1995 to Q1, 1996, but the remainder of 1996 was quite strong, and Clinton was granted a second term. Clinton was both the other president who avoided having even a single quarter of above average inflation, and the other president who avoided having a recession during an entire 8-year term.  During the 8-year term of Bush Jr. there were only 4 quarters of only slightly above average GDP growth, occurring from 2003 to 2005.  There were 7 quarters of above average inflation, 3 of them just barely so in 2005-6, and the other 4 in 2007-8, just prior to the economic collapse.  The remainder of his term was in the mild doldrums region.  The collapse ushered in the Obama administration.  Within his first year, the economy was back into the mild doldrums area that has so far been typical of the current century. 

Here is one more graph, showing how each administration performed, as an average over its entire term.  Starting with Truman, the yellow line leads us to each successive administration, up to Obama.

Obama’s position suffers from the recession he inherited.  Whether he gets reelected or not, his average will move up each remaining quarter of his presidency.  If he gets a second term, we can expect more of the doldrums we have experienced over the last two years.

This clearly belies the Romney claim that Obama’s economic policies have failed.  His policies have moved us from near-depression to mere mediocrity.  That counts as some sort of success.

So, here is my narrative.  First off, one can argue that the president does not directly determine the economic fate of the country, and that is partly true.  The other part is that the president sets the policy and the tone, and that both of these things matter.

–  The only presidents to have achieved term averages in the prosperity quadrant were Democrats.
–  The only Republican to achieve above average real GDP growth was Reagan, and that was only by an increment.
–  The only president since Reagan to achieve higher GDP growth than his predecessor was Clinton, other than that, it’s been a downward spiral.
–   Carter had below average GDP growth by a slight margin, but he beat every Republican other than Reagan, and he didn’t trail him by much.
– The last 44 years have been characterized by secular decreases in both CPI inflation and GDP growth.
– They have also been characterized by Republican presidencies 64% of the time, decreasing regulation, lowered tax rates, safety net erosion, loss of labor union strength and participation, and the systematic undoing of of New Deal policies.

What I conclude is that New Deal (dare I say Keynesian?) policies were successful in generating real prosperity, and free market policies have been far less successful.  Over time, Reaganomic trickle-down, free market policies have given us first, the Great Stagnation, and ultimately the worst economic crisis in 80 years.  These policies were, by no coincidence at all, quite similar to those in effect when the Great Depression of the 30’s happened – and also all the other earlier depressions that are no longer very prominent in people’s memories.

As I said, policy matters – and it matters profoundly.

With that in mind, here is my question to the Fed:  Since the average of CPI inflation since WW II is 3.7%, and there is ample evidence that we can have very reasonable economic performance with inflation in that range, why have you set an inflation target that is effectively half of that level, while ignoring high unemployment –  the other half of your alleged dual mandate?

Of course, I’m being rhetorical.  It’s because they are bankers, and inflation favors creditors borrowers, not lenders.  The fact is they don’t care one whit about unemployment.

Policy.

It matters.

Cross-posted at Retirement Blues.