I keep seeing references to the 1970’s stagnation that reflect a consensus belief that real GDP growth in the 1970s was significantly lower in the 1970s than in the 1980s.
But this is contrary to the data:
REAL GDP GROWTH( % )
Yes, the 1970s had a serious problem with inflation, but that does not negate the fact that real GDP growth was actually higher in the 1970s than in the 1980s. We need a different term to correctly describe the 1970s rather than stagnation.
So why do knowledgeable economist like Krugman not recognize that applying the stagnation term to the 1970s creates a false impression about our economic history.
Mike’s post here got me thinking. I’ll telegraph my conclusion. He dramatically understated his case.
You can see the long range view of nominal and inflation adjusted GPD growth in Graph 1 of FRED quarterly YoY percent change data.
Graph 1 YoY growth Nominal and Inflation Adjusted GDP
Nominal GDP Growth was in a secular up-trend from 1960 through 1980. However, inflation adjusted GDP growth quickly peaked after the Kennedy-Johnson tax cut, reaching a maximum value of 8.5% in Q4 of ’65 and Q1 of ’66. It then dropped dramatically for the next four years. This peak value has been matched only once since: in 1984, during a sharp rebound from the double dip recession of 1980-82.
Since then, in the wake of numerous tax cuts, the rate of GDP growth has been anemic. To get a look at the rate of growth, I took an 8 year average of the annual percent change data presented above, and then plotted a 5 year rate of change for that data. This is essentially the 2nd derivative of GDP, or GDP acceleration, as shown in Graph 2.
Graph 2 GDP Acceleration
Inflation Adjusted GDP acceleration peaked in Q3, 1966. Fueled by the inflation of the 70’s, NGDP acceleration stayed high until Q1, 1980, then plummeted for 9 years. It has been relentlessly negative since.
Inflation adjusted GDP acceleration has not done quite as badly in this disinflationary era, but has been below zero more than half the time since 1970. This is a little bit worse than coasting.
This all might seem a bit abstract, but the message is clear. If tax cuts were good for the economy, then GDP growth would be increasing. In other words, acceleration would be positive and most especially so after a tax cut. The data is not consistent with this notion.
Clinton’s famous tax increase preceded increased GDP growth by either measure, and an upturn in acceleration. The Bush tax cuts preceded decreasing GDP growth.
I’m not going to get into a correlation vs causation discussion. I’ll simply say that tax cuts over 5+ decades have been an utter failure at stimulating real economic growth in any inflationary environment. Since the real world data correlation is counter to the received conservative wisdom, it might be worth trying an anti-conservative approach.
It might also give the NGDP targeting enthusiasts something to ponder.
That Rick Perry is a clueless candidate and skilled campaigner is something for Barack Obama’s minions to suffer.* That Perry’s curiosity goes no further than “Where’s My Next Corndog?” cannot be held against him; he only became what they made him, just as his predecessor did, though with a poorer transcript and lack of his father’s Rolodex. A real Horatio Alger story.
So we need to pay attention to who tells him things. And that appears to be people such as Richard Fisher, who recently went to W’s “home town” and bragged about the local economy. He starts by making any sane human being worry:
I, along with the 11 other Federal Reserve Bank presidents, operate the business of the Federal Reserve as efficiently as any bank in the private sector.
[W]e make money for the U.S. taxpayer: We returned over $125 billion to the U.S. Treasury in 2009 and 2010. You are looking at one of the few public servants that make money from its operations, rather than just spending taxpayer money.
English translation: We took money from the Treasury, and our Accounting looks nice because we don’t count the overpaying for “assets” or the free money on “excess reserves” as part of our losses. We can even make a foolout of Allan Sloan.
Oh, and by the way, we don’t “just spend taxpayer money,” like those evil people who run police departments, fire departments, and schools; or make roads, or ensure food and water safety; or do fundamental scientific research, to name a few, do.
Then he tries to tell his constituents that Texas is great, and that he will put “a heavy focus on the data,” which is supposed to explain (“connect the dots”) on why he “dissented from the consensus at the last meeting of the Federal Open Market Committee (FOMC).”
So the data should, at least, show an “I got mine, Jack” aspect, no? Let’s see below the fold if it does.
First he presents a graphic showing non-Agricultural Employment Growth baselined at 1990. Now, I might consider this a bit of cheating: in 1990, Texas was in the midst of its self-created S&L crisis. If it didn’t recover from them compared to the rest of the United States, I would assume (contra Brad DeLong [link updated]) that people realised there was no water table and therefore no opportunity for long-term growth (as opposed to the already-well-developed Greater NYC area and the San Francisco Fed areas** to which he contrasts Dallas).
Suffice it to say, you don’t get quite so dominant a picture if you start in mid-1992.
But let’s ignore that it’s easier to build if there’s Nothing There, and easier to expand if there are natural resources even if the rest of the area is a Vast Wasteland or Lubbock (but I repeat myself***). And let’s just look at what good all those jobs have done, with a heavy focus on, well, FRB Dallas data (from the start of their data):
Hmmm, not exactly consistent manufacturing productivity, even before the (recent) recession. Indeed, I might suspect that Texas since around early 2006 has been dependent on moving Services jobs there, not growth in the local economy. But I’m not a Fed Governor:
Now, let’s look at job creation in Texas since June 2009, the date that the National Bureau of Economic Research (or NBER, the body that “officially” dates when a recession starts and ends) declared the recent economic recession to have ended….[I]t is reasonable to assume Texas has accounted for a significant amount of the nation’s employment growth both over the past 20 years and since the recession officially ended.
Let us give him credit for admitting that the 49.9% number is major b*llsh*t. And half-credit for admitting that, if you drop the states that are still heavily negative, the number is below 30%. So things must be looking up in Texas, right?
Hmmm, a nice recovery—rather similar to the 1991-1992 gain—followed by some drop-off, water-treading, and another peak early this year that suggests seasonality, even though the data is Seasonally Adjusted.**** Difficult to argue an upward trend (see most recent footnote), but maybe stable.
Then again, I’m still not a Fed Governor. But let’s give him some credit for admitting this self-inconsistent point:
The most jobs have been created in the educational and health services sector, which accounts for 13.5 percent of Texas’ employment.
And credit Fisher for being fair enough to note the elephant in the Texas room:
I should point out that in 2010, 9.5 percent of hourly workers in Texas earned at or below the federal minimum wage, a share that exceeds the national average of 6 percent. California’s share was 2 percent and New York’s was 6.5 percent.
And for not thinking that the Fed’s dual mandate needs to prioritize nonexistent “inflation threats.”
It might be noted by the press here today that although I am constantly preoccupied with price stability―in the aviary of central bankers, I am known as a “hawk” on inflation―I did not voice concern for the prospect of inflationary pressures in the foreseeable future….My concern is not with immediate inflationary pressures.
Well, that’s good. And since the other half of the dual mandate is full employment, you’ll be expecting something positive from businesses, then, eh?
Importantly, from a business operator’s perspective, nothing was clarified, except that there will be undefined change in taxes, spending and subsidies and other fiscal incentives or disincentives. The message was simply that some combination of revenue enhancement and spending growth cutbacks will take place. The particulars are left to one’s imagination and the outcome of deliberations among 12 members of the Legislature.
Ma nishta ha-laili ha-zeh? But Fisher digs deeper:
On the revenue side, you have yet to see a robust recovery in demand; growing your top-line revenue is vexing. You have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency. You have money in your pocket or a banker increasingly willing to give you credit if and when you decide to expand. But you have no idea where the government will be cutting back on spending, what measures will be taken on the taxation front and how all this will affect your cost structure or customer base.
Huh? I thought government was mean and evil and just spends taxpayer money. Shows what I know; I listened to a Fed Governor, one who tells me that businesses “have been driving profits or just maintaining your margins through cost reduction and achieving maximum operating efficiency.” Really should see some nice Production numbers in the past six months, then, no?
No. So when Richard Fisher later says:
[The business owner] might now say to yourself, “I understand from the Federal Reserve that I don’t have to worry about the cost of borrowing for another two years. Given that I don’t know how I am going to be hit by whatever new initiatives the Congress will come up with, but I do know that credit will remain cheap through the next election, what incentive do I have to invest and expand now? Why shouldn’t I wait until the sky is clear?”
There are two answers. The first is the obvious: the Fed only controls short-term rates for risk-free investment. They don’t control lending rates, and they don’t control long-term rates, which are what I’m interested in if I’m “going to hire new workers or build a new plant.” Now, QE2 made it marginally easier for me to borrow in the long-term, but that’s gone now. So unless I’m stupid enough to pretend I’m a bank—if I borrow short-term and create long-term liabilities, I better be damned sure someone will refinance me until the project is finished—the Fed guaranteeing that the short-term Government borrowing rate is going to stay low for a while doesn’t mean much to me.
The second is more interesting: if I believe in competitive advantage, I want my new products on the shelf before my competitor has hers there. I cannot sell what you cannot see. So I want my plant started now—while I can still get the best available workers before my competitor does, while I can still pick a prime location (less of an issue in a Vast Wasteland, but not insignificant if you’re Dallas- or Houston-area), and while I can negotiate a deal with someone who needs me in their space more than I need to be there.
But that is only true if Richard Fisher has been telling the truth about how well I’m running my Texas-based business. And that, not to put too fine a point on it, appears to be—to coin a Texas phrase—bullshit.
I know the reality of Rick Pery: it’s a hermetic, incurious one in which women are property, you read what they tell you, and you get to take credit for a win, even if it’s your handlers doing all the work, including telling you what to do later. It’s not a world of which I approve, but my lack of approval doesn’t mean I believe it doesn’t exist.
I don’t know what reality Richard Fisher inhabits; it is certainly not one in which there is “a heavy focus on the data.” At least not data that is related to the Fed’s dual mandate, or how nonfinancial businesses make long-term decisions, or how to attain a competitive advantage.
Rick Perry speaks to his true believers. Richard Fisher expects you to believe him. Currently, only one of them is trying to do national harm to the economy, and it’s not the (soon-to-be) 45th President of the United States.
*And the rest of the United States when Bachmann-Perry Overdrive starts on 20 January 2013, but that’s tangential.
**Fairness requires me to note that much of the state of California is a desert, though not so bad a one as most of West Texas. Accordingly, growth in those areas would, pari passu be similar to that of Texas, save that there is nonot enough***** oil in Central California. But never let it be said that we would expect an FRB official to understand geography.
Today Eurostat released their estimate of Euro area growth for the first quarter of 2011. The economy grew smartly, or 0.8% on the quarter on a seasonally- and working day- adjusted basis. On the face of it, Euro area growth, which is 3.3% on an annualized basis, dwarfs the 1.8% seen in the US economy. Really, though, it’s joint German and French growth that tower US Q1 GDP growth.
Eurostat doesn’t explicitly highlight how inordinately unbalanced is growth across the region in their report . Germany and France alone accounted for roughly 72% 78% of the quarterly growth of Euro area GDP.
(As I highlight below, the Euro area quarterly growth rate in the chart is slightly different to that in the Eurostat report since some euro area members are missing. The cross-sectional contribution should be roughly unchanged during the revisions, though.)
Update: This chart has been re-posted with only slight modifications from the original. It does not change the article’s premise in any way. H/T to Philippe Waechter in comments below.
READ MORE AFTER THE JUMP!
If final demand was growing so quickly in Germany, I would say that the Euro area is adjusting more healthily than I had expected. Spenders become savers and vice versa, and capital flows adjust current account balances (and trade) accordingly. Germany spends more at home and abroad, while the Periphery less so. This does seem to be occurring according to the Federal Statistical Agency:
In a quarter-on-quarter comparison (adjusted for price, seasonal and calendar variations), a positive contribution was made mainly by the domestic economy. Both capital formation in machinery and equipment and in construction and final consumption expenditure increased in part markedly. The growth of exports and imports continued, too. However, the balance of exports and imports had a smaller share in the strong GDP growth than domestic uses.
Euro area average growth is likely slow down a bit, as the global economy moves toward a tightening bias and fiscal austerity clenches demand further. However, the outlook for the Euro area as a whole does look increasingly reliant on the trajectory of German and French economic conditions. This is a risk, especially since Germany is an export-driven economy.
As a comparison, 2005 saw growth as broadly more balanced, where Germany and France contributed a smaller 50% to total Euro area growth.
The Q1 2011 growth trajectory (top chart) is entirely consistent with ECB targeted at the core countries.
This post contains four graphs looking at real economic growth, three of which also contain some tax information.
The first graph shows the five year annualized growth in real GDP for every five year period beginning the one ending in 1934. (I begin then simply because data on real GDP is only available from the BEA beginning in 1929.)
I took the liberty of adding in two lines free-style. The first is my attempt to trace the high points over time, leaving out WW2. The second traces the low points, assuming the collapse from 1929 to 1932 and the post-WW2 drop are special cases. (That huge dip from 1945 to 1950, economic shrinkage and all, is what libertarian professors like David R. Henderson keep referring to inexplicably as a post-war miracle.) Those ad hoc lines seem to indicate that any “Great Moderation” in the economy – whether it began in the 1980s or earlier – is more due to a slowing down of the rapid periods of growth than to a reduction in the severity of downturns. Put another way… the Great Moderation = the Great Suckening (for readers who aren’t economists, that’s a technical term like “sterilizing monetary policy” or heteroscedasticity).
Figure 2 is similar to Figure 1, but it strips out the two ad hoc lines and adds in the five year average top marginal individual income tax rate.
As Figure 2 shows, there doesn’t seem to be much of a relationship between the average top marginal tax rate in any five year period and the annualized growth in real GDP over that same period, and certainly there’s no sign from this graph that higher tax rates discourage economic growth. The fact that the correlation between the two series is positive indicates that if anything, in general real economic growth rates have tended to be higher when tax rates were higher.
Figure 3 is a scatter-plot version of the data in Figure 2.
Notice that it kind of looks like you can put a quadratic curve to these points – at “low” tax rates, increasing tax rates are associated with faster economic growth. Only at very “high” tax rates – somewhere north of 70% or 80% – does it appear that reducing tax rates are associated with faster economic growth. Reminiscent of this graph, dontcha think? Another thing that’s noticeable… the greater variability in growth that accompanies higher tax rates, which was also visible from Figure 2.
Finally, Figure 4 is the same as Figure 3, but rescaled to leave out 1942-1945, which only makes the lack of a lower taxes = faster economic growth relationship more obvious.
As always, if you want a copy of the spreadsheet where these graphs were produced, drop me a line. I’m at mike period my last name (that is “kimel” – one m only!) at gmail period com.