Sunday, May 28, 2017

Skipping a stone across recent years

Early 2008, not long before the 2009 recession: Real GDP (blue) is right on track, and the track itself (Potential GDP, gray) is predicted to continue rising, undisturbed, for a decade:

Splash #1

Early 2010: In the past two years there was a recession (vertical gray bar). Real GDP (blue) dropped significantly, then turned upward again. In addition, Real GDP has been revised and now uses "2005 Dollars" rather than "2000 Dollars". 2005 Dollars are worth somewhat less than 2000 Dollars. It takes more of them to buy a given amount of Real GDP. That makes the blue line higher:

Splash #2a
For purposes of comparison, the above graph shows the "track" (Potential GDP, gray) as it was in early 2008. In point of fact, Potential GDP was also revised to use 2005 Dollars and, like Real GDP, is higher than it was before the revision:

Splash #2b
With blue and gray both revised, blue still appears to follow gray about as closely as it did before the revision, except since the 2009 recession. Also, for the future, gray appears to fall slightly below the path predicted in the previous graph, then return to it.

Late 2010: Ezra Klein examines the gap created by the 2009 recession. He looks at ways to to bring output back up to trend: Real GDP could accelerate quickly, or slowly, or not at all.

Splash #3

Early 2012: Pursuing Ezra Klein's third option, Real GDP (blue) continues on its new, lower path. Meanwhile, expectations have been somewhat reduced: The old 2010 trend (gray) has been lowered for 2012 (red):

Splash #4
In February John Taylor shows two graphs of recession and aftermath. One graph considers the 1982 recession, after which the recovery was like Ezra Klein's "rapid acceleration" model. The other considers the 2009 recession, after which the recovery is like the "no acceleration" model. But Taylor's graphs are not models. They are actuals.

That same month, James Bullard (PDF, 6 pages) offers a story to explain why we have a "no acceleration" recovery. In the years before 2008 our economy was in a bubble, he says. And the path predicted for our economy (gray, on Graph #1 here) was based on the bubble.

Imagine our economy without that bubble, Bullard says: predict a future path based on that lesser economic performance, and you will have a better prediction. In other words: Forget the Ezra Klein graph. We're not going to bring Real GDP up to trend. We're going to bring the trend down to meet Real GDP.

As I write this today (2017) Bullard's story seems reasonable, even to me. Bullard's is now the accepted story. How did we get here?

Late 2012: Scott Sumner says if the new (lower) trend continues he will "throw in the towel" and accept it:

In 2009 I advocated going all the way back to the old trend line. I currently favor going about 1/3 of the way back. If we keep on the same track for a few more years I’ll through in the towel and advocate starting a new 5% trend line from where we are.

Sumner, struggling to accept the lower trend.

2014: Marcus Nunes shows a graph of Real GDP since the 1980s, including the 2009 recession and the slower growth since that time. The graph also shows the old and new trends of Real GDP growth:

Splash #5
"For RGDP the trend growth rate is 3.3%," Nunes says. But "There´s no doubt that the economy was 'shifted down' during what has become known as the 'Great Recession', and it looks as if this shift is 'permanent'."

Yes, when the economy falls below trend, it is reasonable to assume that it will rebound back to it. The only thing is that the trend it will rebound to is the new much lower one. And that´s something that makes me think that there´s a wide acceptance of the new trend.

What this implies is that over time the “old trend” will, for all sorts of economic reasons, “cease to exist”, in fact coming down all the way to become one with the new trend level, in which the real economy grows at 2.2%...

Nunes worries that people will, like Sumner, forget about the old trend and accept the new one. There is wisdom in his words.

2016: “Is current output really 18% below potential output?” Menzie Chinn puts the question in quotes, suggesting he does not accept the 18% number. He explains:

One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is … -18%.

In other words, he says the 1984-2007 trend must be wrong. This graph, he says, "highlights the implausibility of the -18% output gap":

Splash #6
Menzie Chinn has turned a corner from Marcus Nunes. The old trend is unreasonable, Chinn says; therefore the new trend must be right.

His evidence? The long duration of the new, lower trend. Chinn enhances that duration by showing the new, lower prediction of Potential GDP, which conveniently aligns with the reported data. In fact, though, the new measure of Potential GDP is not better or more accurate than old measures of Potential GDP. Not better, only different. Lower.

And the duration of slower reported growth is not evidence that the old high trend was wrong. It may only be evidence that economists have not yet found the problem, and policy has not yet fixed it.

Marcus Nunes was right: The old trend has ceased to exist. People like Scott Sumner and Menzie Chinn no longer expect good growth to return. With their minds at last made up, economists can now go back to explaining the world making up their stories.

Saturday, May 27, 2017

Time for another update already

Thursday, May 25, 2017

Just to be sure

This graph (from yesterday's post) shows average growth rates for periods beginning in 1930. But the graph is a close-up. It only shows the years since 1952:

Graph #1
So the first point on the red line represents average growth for the 1930-1952 period. This seems misleading, as the years before 1952 are not shown. I want to re-do the calc, figuring average growth rates for the period beginning in 1952.

I'll keep the green line from the first graph, the "average annual growth" calculation from BEA. I'll toss the running average line, and make a new red line using the BEA calc on data from 1952 and after:

Graph #2

The new red line shows a lot of variation in the early years. That's to be expected, as there isn't much to average against. The green line has a backlog, 20 years of data from before 1952, acting like an anchor to prevent the green line from moving when the blue line moves.

In the early years the red line has no such backlog, so big changes in the blue line create big changes in the red. After a dozen years or so, the red has a backlog of its own. Then it is not so much influenced by changes in the blue. And then we see the red and green run side-by-side.

By the time the red and green run side-by-side, both are more influenced by their past than by each new change in the blue line. So if somebody says average RGDP growth in the 1947-2017 period is 3.21%, it tells us more about the past than it does about today.

On the other hand, if the side-by-side years show a general downward trend, it means there are so many below-average years that they are dragging the anchor down. I conclude, then, that the important information in these long-term averages is not that the average value is 3.21% or 3.3% or whatever.  The important information is that growth has been going downhill since the 1960s.

I go back to the first graph and this time keep the red line, the running average since 1930. I get rid of the green line and create a new one showing the running average since 1952. This time we compare running averages for two different start-dates.

Graph #3
This time the red line has an anchor, two decades of data from before 1952. The green line doesn't. So the green line responds more to changes in the blue than the red line does. But again, after a dozen years or so, the "since 1952" line has its own backlog, and we see red and green show the side-by-side behavior.

We get the same behavior for running averages as we got for the BEA calculation. It turns out that the "backlog" is more significant than the calculation that makes use of it. To me this says the long-run average isn't worth much, except it shows that new growth keeps dragging the average down.

To finish up, I'm replacing both lines on the first graph with the "since 1952" data.

Graph #4
Red and green follow the same path: decline since the 1960s.

// The Excel file

Wednesday, May 24, 2017

Decline of the long-run average

Today we look at long-run economic growth, and along the way compare the results of a running average calculation to a more complicated (but no doubt more accurate) calculation that the BEA uses to figure average annual growth.

The other day I read that the

GDP Growth Rate in the United States averaged 3.21 percent from 1947 until 2017

That reminded me of Marcus Nunes telling me

It´s more or less recognized that US RGDP is trend stationary (maybe that´s changed now!), with real growth averaging about 3.3% from the early 50s to 2007.

I'm not comfortable using averages that way. Compared to the economic growth of the last ten years, 3.21% average growth (1947-2017) seems quite high. And yet 3.21% is noticeably lower than Marcus's 3.3% for the period ending in 2007. It seems the more recent the end-date, the lower the average growth. I want to look at the numbers.

(Yes I know, the two long-term averages have different start-dates too. That's another reason I have to make my own graph!)

The first graph today shows Real GDP (annual data, faint gray, right-hand scale) along with annual growth rates (blue), an average of the growth rate values (red), and an average I got by using the BEA's "variant of the compound interest formula" (green):

Graph #1: On the right is where we have been recently. On the left is where we were before.
Both averages are figured for the full period to date. (The average for 1931 is based on the years 1930 and 1931; the average for 1975 is based on the years 1930 thru 1975; and the average for 2016 is based on the 1930-2016 period.) All the years since 1930 are included in each year's average.

I was happy to see there is not much difference between the red and green lines. No doubt the BEA's method is more accurate than a simple running average, but the running average looks like a good rough estimate. And the two lines seem to follow a similar path.

The blue line is up near 10% growth for a few years in the mid-1930s, and approaches 20% in the early 1940s. There are extreme lows before and after these extreme peaks. Then the next high after that has two dots a little below 10%. Those two dots represent 1950 and 1951. The second graph begins in 1952, and shows the same values as the first graph:

Graph #2: On the left is where we were before. On the right is where we have been recently.
Red and green run close together and show the same variations. Toward the right end, the green line is hidden behind the red, but both lines continue all the way to 2016.

Also, it is a little more obvious on this graph that average RGDP growth is in decline; red and green both show it. The averages ran at or above the 4% growth rate until 1980, then fell noticeably below the 4% rate.

Blue dots above the average pull the average up. Blue dots below the average pull the average down. The last blue dot above the average occurred in 2004.


The red and green lines never go as low as 3%. So for any year you pick, it wouldn't be wrong to say "The GDP growth rate in the United States averaged above 3.0 percent from 1952 until [year]". Sounds pretty good, right? Especially compared to the slow economy of recent years.

It is even true. But it is nonsense. Economic growth has been slowing. And the trend of growth has been slowing. The trend shows where the economy is going in the longer term.

You don't get a feel for where the economy is going when somebody says the average growth rate since 1947 is 3.21%. There were a lot of good years since 1947, that helped to bring the average up. That doesn't do us any good when we've been below the average for years. It's like you got an F on a test and your parents find out, and you tell them "Yeah, but the class average was a B!" That's not gonna help you.

And it doesn't give you a feel for where the economy is going when an economist says GDP is "trend stationary" at 3.3%. It doesn't even sound like things are going downhill. But they are.

// The Excel file

Tuesday, May 23, 2017

Comparing conclusions

From Time magazine, December 31, 1965
If the nation has economic problems, they are the problems of high employment, high growth and high hopes. As the U.S. enters what shapes up as the sixth straight year of expansion, its economic strategists confess rather cheerily that they have just about reached the outer limits of economic knowledge. They have proved that they can prod, goad and inspire a rich and free nation to climb to nearly full employment and unprecedented prosperity. The job of maintaining expansion without inflation will require not only their present skills but new ones as well. Perhaps the U.S. needs another, more modern Keynes to grapple with the growing pains, a specialist in keeping economies at a healthy high. But even if he comes along, he will have to build on what he learned from John Maynard Keynes.
From the Federal Reserve Bank of St. Louis Review, November/December 1998:
I am sure rigorous economic research of the kind Homer Jones advocated, directed, promoted, and carried out will be essential to developing and adopting policies to raise productivity growth and achieve such a goal. We need a new Homer Jones to help us find policies for economic growth just as we were lucky to have had the original Homer Jones to help us find policies for economic stability.

Monday, May 22, 2017

"More saving means more investment..."

John B. Taylor:
Simply running a budget surplus would help achieve the productivity growth goal. Why? Because by running a budget surplus, the federal government can add saving to the economy rather than subtract saving from the economy. More saving means more investment...
John M. Keynes:
Those who think in this way are ... are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former.

Sunday, May 21, 2017

Maybe I've been going about this all wrong

John Taylor explains a graph:

The trend line in Figure 1 shows where the economy is going in the longer term...
On the right is where we have been recently. On the left is where we were before.

It's like the commercial on TV that says "6 is greater than 1". Do people really need to be told such things?

Friday, May 19, 2017


A list of economic cycles:

Source: Wikipedia


Off the top of my head, four cycles that didn't make the list:

   •  Short financial cycle (Borio) 16-20 years
   •  Long financial cycle (Greenspan) once-in-a-century
   •  Price waves (D.H. Fisher) 150-300 years, give or take
   •  Cycle of Civilization (Arthurian) 2000 years, give or take


Wikipedia's list indicates a "technological basis" for the Kondratieff wave.  Note, however, that Kondratieff found his cycle in prices [and interest rates]. Also, the Juglar cycle is referenced to "fixed investment". But as Yoshihisa points out in the IWATA PDF, "Conventionally, “Juglar Cycle” is attributed to the investment cycle. But his logic is mainly credit and speculation." So at least two of the four cycles listed have a monetary or financial basis. Plus all four of the ones I added to the list.


Eight cycles listed, total off the top of my head. Six of the eight are observed in or driven by or closely related to money or credit or finance. And that's just off the top of my head.

Thursday, May 18, 2017

The road not taken

"Professor Commons, who has been one of the first to recognise the nature of the economic transition amidst the early stages of which we are now living, distinguishes three epochs," Keynes wrote in 1925, "three economic orders, upon the third of which we are entering."

The three epochs identified by Professor Commons are the Era of Scarcity, the Era of Abundance, and the Era of Stabilization. The change from the second epoch to the third, according to Keynes, is the source of some troubles.

Robert Skidelsky writes:

The classical economists of the nineteenth century looked forward to what they called a “stationary state,” when, in the words of John Stuart Mill, the life of “struggling to get on…trampling, crushing, elbowing, and treading on each other’s heels” would no longer be needed.

According to Skidelsky, the classical economists of the nineteenth century thought with Professor Commons that the world would move from abundance to stabilization. Skidelsky brings this up to make the point that secular stagnation (as described by Larry Summers) *IS* the stabilization, and we should get used to it: "one should view secular stagnation as an opportunity rather than a threat", Skidelsky says.

I say one should have doubts about any era of stabilization. The economy moves in waves and cycles. Growth follows recession follows growth. Why would this suddenly stop? Why would the economy suddenly "stabilize"? One day general equilibrium is unachievable, and the next day it is thrust upon us -- stable general equilibrium, no less. Hogwash.

It is unrealistic to think the world will stabilize. It is beyond ridiculous to think it will stabilize at an acceptable level of output. It is laughable to think it's all under control.

Can we make it happen? Possibly. But that is a different road than the one we have taken.

Asked whether there had ever been anything like the Great Depression before, John Maynard Keynes replied, "Yes, it was called the Dark Ages, and it lasted 400 years."

The fall of Rome was a Great Depression on a grand scale. Professor Commons' "Era of Scarcity" was the long, slow recovery from that economic collapse. The "Era of Abundance" was the grand-scale boom. These are parts of a cycle, a business cycle on a grand scale: the cycle of civilization.

In place of the Era of Stabilization we can reasonably expect another grand-scale Depression, another "Fall of Rome", only this time it won't be Rome.

Can we avoid it? Possibly. But that is a different road than the one we have taken.

Now, as the final day of his campaign drew to a close, Scipio Africanus stood on a hillside watching Carthage burn. His face, streaked with the sweat and dirt of battle, glowed with the fire of the setting sun and the flames of the city, but no smile of triumph crossed his lips. No gleam of victory shone from his eyes.

Instead, as the Greek historian Polybius would later record, the Roman general "burst into tears, and stood long reflecting on the inevitable change which awaits cities, nations, and dynasties, one and all, as it does every one of us men."

In the fading light of that dying city, Scipio saw the end of Rome itself.
- Charles Colson in Against the Night

Arnold J. Toynbee identified at least 23 civilizations. Most of them are dead and gone. Toynbee, though, said the death of civilization was avoidable. Stefan Zenker lays it out:

In contrast to Oswald Spengler, who thought that the rise and fall of civilizations was as inevitable as the march of the seasons, Toynbee maintained that the fate of civilizations is determined by their response to the challenges facing them... The unifying theme of his book is challenge and response.

Challenge and response. If our response meets the challenge successfully, civilization advances. If not, civilization declines. It's that simple.

But we must choose the road less traveled. And that means that most of us have made the wrong choice.