Should We Be Surprised by Slow US GDP Growth ?
I am fairly sure it is a coincidence, but current US GDP is not disappointingly low compared to an almost incredibly crude forecast based on data from before 1990.
This graph (which you have to click more to see) shows the natural log of US real GDP and a quadratic trend estimated using data from before 1990
According to this graph, current GDP is not anomalously low. Rather GDP in the 90s and 00s was anomalously high. I am almost tempted to take it seriously, because, with the benefit of hindsight, it seems that GDP was driven up by the dot.com and housing bubbles during those periods.
If taken literally, the trend implies that GDP growth declines by -0.029 percent per year per year.
I was interested in the extent to which deviations from quadratic trends estimated with pre 1990 data might be useful when forecasting. I don’t have any particular conclusion
Here is a crude regression
linvr is log real investment minus a quadratic trend estimated with pre 1990 data
lconsr is log real consumption minus a quadratic trend estimated with pre 1990 data
the dependent variable d4linvr is linvr minus linvr lagged one year
l4linvr is linvr lagged one year
l8linvr is linvr lagged two years
l4lconsr is lconsr lagged one year
l8lconsr is lconsr lagged two years
The coefficients were estimated with overlapping 4 quarter intervals, so the standard errors were corrected for serial correlation.
Based on this regression it is possible to forecast the change in real investment out of sample giving forecasts pd4linvr .
The regression suggests that investment reverts towards the quadratic trend and also that high growth of consumption is followed by high growth of investment.
Using only post 1990 out of sample data, the forecasts are significantly correlated with actual changes in real investment
Here is the scatter of out of sample forecasts and outcomes
Note that the scales are different.
I don’t think I have to type that I tried this first with the annual change in log GDP as the dependent variable. That gave similar results within the pre 1990 sample, but the out of sample forecast growth rates weren’t singnificantly correlated with the out of sample actual growth rates.
I’m not sure what to make of my empirical work with 1960s era econometric techniques. I do find the suggestion that investment is strongly mean reverting (as in related to bubbles which burst) highly plausible.
I think you’re right in general about the bubble effects , but I don’t think the dotcom bubble was “artificial” in the sense that the housing bubble was , as it was mainly equity-financed , with no trend increase in nonfinancial debt/gdp.
I’d like to see what curve you’d generate using pre-1980 data , as that was the period of stable nonfinancial debt/gdp. Although the 80’s doesn’t appear bubble-like in terms of gdp growth , it was bubble-like in terms of debt growth. I think you might get something more like this :
( nonfinancial debt/gdp is the thin line , right scale )
I think you’d see roughly the same pattern over roughly the same time spans for Japan and other advanced economies , as well as the world in total. The “age of financialization” was experienced by most countries of any significance , and higher leverage tends to stifle growth as the financial parasite engorges itself.
The idea that we needed “deepening” of our financial markets from a debt/gdp ratio of ~130% pre-1980 to the current level of ~ 245% is , IMO , ludicrous. We went from an economy with self-sustaining demand , financed by incomes , to an unsustainable debt-based regime. Of course , it did allow for the upward redistribution of income ( exactly as planned , no doubt ).
Thanks for the excellent comment Marko. It does make a big difference. The quadratic trend estimated with data up to 1980 lies above the trend I estimated. If normal is defined as the way things were before 1980, current GDP is pathologically low.
For many rich countries growth has slowed. For all countries but the USA this was expected as they converge towards US levels of per capita GDP. I think it is hard to distinguish the effects of financial hyptrophy and of getitng close to the richest country. I can (and has and will) be tried with cross country growth regressions. But few people have changed their beliefs as a result of cross country growth regressions.
Your graph has a linear trend.
STATA thinks the quadratic term is significantly negative even with data only before 1980q1
. reg lgdp qtr qtrs if qtr<1980
Number of obs = 132
Root MSE = .03124
lgdp | Coef. Std. Err. t P>|t| [95% Conf. Interval]
qtr | .4196768 .1315535 3.19 0.002
qtrs | -.0000973 .0000335 -2.90 0.004
_cons | -440.7799 129.1423 -3.41 0.001
qtr ist the date AD and qtrs is the date AD squared
But with data through 1990 the coefficient is almost twice as large and overwhelmingly significant
using data before 1990q1
qtrs | -.0001629 .0000177 -9.18
and using data through 2015q1 it is more like the regression with data before 1990
qtrs | -.0001452 5.97e-06 -24.32
Interestingly the quadratic term is not negative at all if only data before 1973 are used. This supports the standard view of a break in the trend about then.
Anyway thanks for the comment.
Cool. Thanks for the update.
Actually , the 1973 break fits nicely with the inequality trends , IIRC , which might be the early cause , moderated by debt growth in the 80’s perhaps , but at the longer-term expense of climbing on a leveraging treadmill with no easy way to get off.
Yes , the cross-country stuff is complicated. Distance from the tech frontier , aggregate debt/gdp and distribution of incomes and debt are all factors that would make it messy. Other stuff , too , I’m sure. Still , it would be interesting if common patterns were revealed.
This paper today from the BOE gives appropriate consideration to the “3Ds” , IMO :
“Debt, Demographics and the Distribution of Income: New
challenges for monetary policy”
This summation cuts to the quick :
“The economy may not revert to its pre-crisis average levels of growth and interest rates. But many of the models we use in policy analysis do revert to pre-crisis averages, because persistent effects from the 3Ds are ruled out BY DESIGN. ” ( my caps )
This is something that mainstream econ must own , in full , despite the denial and self-serving apologetics of SWL , Rodriks , Krugman , and others.