Sunday, July 23, 2017

Averages, above-average averages, and below-average averages

Yesterday I said

When economists talk about "the Great Moderation" they refer to a time when growth was more consistent. Not necessarily high or low. Just not a lot of variability. However, if the reduction in variability occurs primarily because the "high points" of growth are lower than in the past, then the low volatility of the Great Moderation will primarily be the result of consistently low growth.

I was thinking something like this, from VOX:

the nature of the volatility reduction associated with the Great Moderation is linked to the features of expansion phases, in particular, to the absence of high growth recoveries.

But I made a graph, and now I don't know. I broke Real GDP per Capita into three periods on the graph:

1. Before the Great Moderation (1948-1984)
2. The Great Moderation (1985-2007)
3. After the Great Moderation (2010-2017)

Quarterly data. I left out the crisis years 2008-09 as not relevant to the topic of volatility reduction.

For each period I figured the average rate of growth. This allowed me to split the data into two groups for each period: values above the average, and values below the average. Then I got averages for those two groups. I put all three average values on a graph, for all three periods. The period averages are shown in blue. The averages of "above average" values are shown in red. And the averages of "below average" values are shown in green:

Graph #1: Economic Performance Before, During, and After the Great Moderation
The blue line shows the average growth of Real GDP per Capita. A little better before the Great Moderation than during it, and a lot worse after.

More noticeable, however, are the changes in the red (above average) and green (below average) period averages. The "good" performance during the Great Moderation definitely indicates "the absence of high growth recoveries". But the "bad" performance definitely indicates an absence of severe recessions as well.

The "bleedin obvious" I guess.

Nice conclusion, Art. And all you had to do was leave out the severe 2008-09 recession.

// The Excel file

Saturday, July 22, 2017

How does growth affect volatility?

Friday, July 21, 2017

How volatility is calculated

Wednesday, July 19, 2017

Low volatility, interrupted by periods of high volatility

Under the heading Possible end in Wikipedia's Great Moderation article, we read that some economists have said the Great Recession brought an end to the Great Moderation. Some, but not all. According to the article,

Todd Clark has presented an empirical analysis which claims that volatility, in general, has returned to the same level as before the Great Recession. He concluded that while severe, the 2007 recession will in future be viewed as a temporary period with a high level of volatility in a longer period where low volatility is the norm, and not as a definitive end to the Great Moderation.

I thought that was interesting. I looked up the link the article provides to a paper by Mr. Clark. In his opening, Todd Clark writes:

This article conducts a detailed statistical analysis of the putative rise in volatility and its sources to assess whether the Great Moderation is over. The article concludes that, over time, macroeconomic volatility will likely undergo occasional shifts between high and low levels, with low volatility the norm.

Writing in 2009, Clark said the Great Moderation will probably continue, interrupted by periods of high volatility.

Very interesting. Clark's view of the future is compatible with mine:

Tuesday, July 18, 2017

A Greater Moderation

While making my recent graphs of RGDP per Capita trends, I noticed that the trend line after 2007-2009 completely hides the data from the 2009-2016 period. First I was worried about creating confusion because the data points were not visible. Then I started thinking about "volatility".

I avoided the confusion (I hope!) by bringing the data line to the foreground and making it dotted. But I was left thinking about the volatility. So now I'm making the dotted line continuous again and putting it back behind the red lines where it is partly hidden by them.

I also made the black line thicker this time so you can see it behind the red:

Graph #1
You can see white space between the black and red in the early years. Not so much white between them since the 1970s. None since the mid-1980s. And then after the 2007-2009 gap in the red lines, the black would completely disappear behind the red if the black line wasn't thick. After 2007-2009, the volatility is gone!


Using quarterly data for RGDP per Capita, selecting subsets for effect, and looking at the standard deviation of the subsetted data, yes: Volatility has decreased more, since the crisis:

Graph #2
Not sure why people think moderation of economic growth is a good thing.

Monday, July 17, 2017

You are here

Graph #1

Saturday, July 15, 2017

(again, shorter)

It seems there are two ways to think about how things will look if the decline continues. This is the wrong way:

Graph #1: Showing the Most Recent Trend Continuing
If we stay on track with the 2009-2016 trend, by the year 2100 RGDP per Capita will reach the level it would have reached by 2050 if we had stayed on track with the 1949-1973 trend.

But Graph #1 does not show the continuation of decline. It shows only the continuation of the low-growth trend that resulted from the decline. The decline is the change in the rate of growth, from 2.4% to 2.1% to 1.34% and, unless things change, to a growth rate lower than 1.34% in the foreseeable future. And then again. That is the decline.

This is the right way to look at the decline:

Graph #2: A Continuing Decline in the Rate of Growth

Monday, July 10, 2017

The Future of Real GDP per Capita

Scott Sumner says "the neoliberal reforms after 1980 helped growth". He writes:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

One may wonder how much more the economy might have slowed if not for those reforms. Perhaps here we have an answer: 0.76% more.

Graph #1: Natural Log of Real GDP per Capita (black) with Trend lines
2.4% Annual Trend Growth Rate for 1949-1973
2.1% Annual Trend Growth Rate for 1974-2007
1.34% Annual Trend Growth Rate for 2009-2016
Trend growth slowed 0.3% annual after 1973, from 2.4% to 2.1%. When the effects of the neoliberal reforms (or whatever) failed after 2007, trend growth slowed an additional 0.76%, falling to a 1.34% annual rate. The combined decline in the trend growth rate is 1.06%, more than a full percentage point below the 1949-1973 rate.

Based on these numbers, Sumner's story says growth would have slowed 1.06% without the neoliberal reforms, but instead slowed only 0.3% because those reforms were put in place.

In Sumner's next post after the one I quoted above, he considers the question Why did growth slow after 1973? His answer echoes that of Robert Gordon, who says "the life-altering scale of innovations between 1870 and 1970 cannot be repeated." An empty explanation.

Scott Sumner adds to Robert Gordon's story, diluting the meaning with extra words. "Here’s what I think happened," Sumner says:

There were a few underlying technological developments in the late 19th century that dramatically affected living standards in the 1920-70 period, when they were widely adopted in advanced economies. I would certainly include electric power and the internal combustion engine. I also think indoor plumbing is underrated. Imagine having to rely on outhouses in cold climates... Many key products were first invented in the late 1800s or early 1900s (electric lights, home appliances, cars, airplanes, etc) and were widely adopted by about 1973. No matter how rich people get, they really don’t need 10 washing machines. One will usually do the job. So as consumer demand became saturated for many of these products, we had to push the technological frontier in different directions. And that has proved surprisingly difficult to do.

Well, they had indoor plumbing in ancient Rome. But Scott Sumner's "surprisingly difficult to do" tells us no more than Robert Gordon's "cannot be repeated". The question "Why?" remains. And then, "Why 1973?"

More to the point, Sumner's explanation does not account for the second slowdown, the 2007-2009 slowdown. He has a different story for that one. Not enough money, he says. Print more money, he says. Increasing the Fed's balance sheet from 800 billion to 4.5 trillion was not enough, he says.

Two slowdowns, two explanations. But we don't need two explanations. "One will usually do the job."

The greatest weakness in Sumner's story is a weakness he shares with almost all modern-day economists: His argument is a hodgepodge of unrelated tales. In this case, a lack of invention after 1973, plus saturated demand, plus a difficult technological frontier. But then after 2007, tight money was the problem: 4.5 trillion, and still too tight.

The question "Why?" remains.

There is no "big picture" any more, no one overall theory that explains what's wrong with the economy. There has been no big picture since Keynes was rejected by the moderns. Only a hodgepodge of unrelated tales.

What's wrong with our economy is the excessive accumulation of private debt. That was the problem in 2007-09, and in 1973-74, and before, and since. One problem. One problem that never gets better and always gets worse. One problem, ignored by economists who know which side their bread is buttered on.

I can never resist the opportunity to criticize Scott Sumner's economics. But that's not what this post is about. This is not about the decline of economics. It's not even about the reasons for the decline of economic growth. This post is only about how big the decline of growth has been, and how things will look if the decline continues.

It seems there are two ways to think about how things will look if the decline continues. This is the wrong way:

Graph #2: Showing the Most Recent Trend Continuing
If we stay on track with the 2009-2016 trend, by the year 2100 RGDP per Capita will reach the level it would have reached by 2050 if we had stayed on track with the 1949-1973 trend.

But this graph does not show the continuation of decline. It shows only the continuation of the low-growth trend that resulted from the decline. The decline is the change in the rate of growth, from 2.4% to 2.1% to 1.34% and, unless things change, to a growth rate lower than 1.34% in the foreseeable future. That is the decline.

This is the right way to look at the decline:

Graph #3: A Repeating Decline in the Rate of Growth
Two factors affect the up-and-down on this graph: the changing slope of the red lines, and the drop after each red line stops. Two factors affect the left-and-right: the length of the red lines, and the duration of the gap between the red lines. Obviously I made these things up.

The black dots indicate the original source data. After the black dots die out in 2016, it's all just a guess. The last five red lines, including the one that started in 2009, are each shown as 20-year trends. You could change them if you want.

The gaps between the red lines, each is one year longer than the gap before. The gap you can't see (1973-74) is one year. And the 2007-2009 gap is two years. These are actuals. I stuck with the pattern and made the next gap three years, and the next gap four years, and like that. You can change them if you want.

If you change these things, you will stretch the graph out, left-to-right, or shorten it, left-to-right. But you won't change the up-and-down pattern. To change the up-and-down pattern you have to change the growth rates (the slopes of the red lines) or the drops after the red lines stop, or both. You can change those too, if you want, but you should be realistic.

The red line slopes 0.3% less after 1974 than before. Hard to see. After 2009 it slopes 0.76% less than before. Those are actuals. I was going to keep making the number bigger for the future slopes, but I decided against it. Instead, I went with the 0.76% additional decline each time. No one knows what those actuals will turn out to be, but assuming the most recent actual change each time provides a realistic picture.

For the vertical drop at the end of each red line, I did something similar: Each drop is the same size as the 2007-2009 drop. That's as realistic as I can be here, estimating the future.

// The Excel file

Thursday, July 6, 2017

Real GDP per Capita growth: Three Trends

The previous post shows Real GDP with lines that represent growth trends for three different time periods. The topic of the post was the relation between economic growth and population growth.

But come to think of it, RGDP varies when population varies, and a change in population growth would change the trend of RGDP. So I want to take another look at the changes in Real GDP growth trends, this time excluding the changes in population. To do it, I'll look at Real GDP per Capita.

I'll make some other changes, too. Rather than using "billions of 2009 dollars" and showing the numbers on a "log scale", I'll get "log values" from FRED and plot them normally. That eliminates the Log Scale Axis Labels problem I had last time. And because the values are logged, the trends will be straight lines rather than exponential curves. So I can use Excel's "linear" trendline option and keep things nice and simple.

I'll use annual values instead of quarterly, to reduce the work involved. The purpose of the graph is to get a general idea about how the trends have changed, and the annual values are good enough for that. Annual frequency with "end of period" aggregation because, for GDP, it just seems right.

Here's my data source:

Graph #1: Natural Log of Real GDP per Capita, 1947-2016
In order to define trend regions, I divided the dataset into three sections. The break points between sections are so arbitrary they made me hesitate -- hesitate enough to miss a day's posting. But then, missing a day's posting got me working again, "arbitrary" be damned.

I'm ending the first section at 1973 and starting the second at 1974. I'm ending the second section at 2007 and starting the third at 2009. In each case the section ends at a relative high value and the next section begins at a relative low. To be consistent, I started the first section at the relative low in 1949.

Because of these decisions, not all the data points are used to determine the trends. The data points not used are shown in black on the following graph; the points that are used create three separate red lines which represent the source data for the three trend calculations:

Graph #2: Subsetting the Data for Determination of Trends
Once the data was split up into subsets, adding trend lines was easy.

For the next graph, the data not used is not shown. The data that is used is shown in black. And the trend lines are red. The year values are not shown, as adding those values messes up the trendline equations:

Graph #3: Determining the Trends
This one's a little hard to read because the trend lines are too long. I'll fix that, below.

The equation for the first period (1949-1973) shows a slope of 0.024, indicating 2.4% annual growth. For the second period (1974-2007) the equation indicates 2.1% annual growth. And for the third period (2009-2016) the equation indicates a 1.34% annual growth rate.

For both the second and third periods the R-Squared value is 0.9889, pretty close to 1.0. For the first period, R-Squared is somewhat lower, at 0.9571. As I understand it, this means the first-period trend line is somewhat less accurate than the other two. The trend line doesn't match the data as well.

I want to suggest a reason for the mismatch: The first period was not part of the so-called "Great Moderation". The Great Moderation was a time of moderate variability in the data. (The "standard deviation" was less.) With less variability in the source data of the later periods, the trend line should be a better match. And we find that it is. So I think the lower R-Squared of the first period is a result of the fact that the data values varied more in that period, and not that there is something wrong with the trend.

I took the three trendline equations from Graph #3 and changed them to display more decimal places, for greater accuracy when I use those equations to create my own lines. Making my own lines to show the trends gives me greater control over where the lines start and end. Also, I can show the years on the x-axis without messing up the trends.

Graph #4: Three Trends of RGDP per Capita
This graph looks lot like the "three trends" graph for Real GDP in the previous post. But this graph shows that even when the changes in population are set aside, long-term decline of economic growth is evident.

// The Excel file

Tuesday, July 4, 2017

Does GDP growth influence population growth?

For 22 years beginning in 1952, the economy grew at something like a 4% annual rate. For 24 years beginning in 1984, the economy grew at something like a 3% annual rate. And for all the years since 2009, the economy has grown at something like a 2% annual rate:

Graph #1
Assume it is true that population growth influences economic growth. Suppose it is also true that economic growth influences population growth, and look at the graph.

The graph shows the beginning of a very long long-term decline.

// The Excel file

Monday, July 3, 2017

Why is he talking about population?

Why population? Because, to my mind, apart from fiddling with immigration policy and such, population growth responds primarily to economic conditions. Population growth slowed in the 1930s? Because the economy was slow. Population growth picked up in the 1950s? Because the economy picked up.

I don't see it on my graphs, but I want to suggest that the U.S. population growth (not counting immigrants) has been in decline since 1980 because the U.S. economy has been in decline since that date. Or maybe the date should be 1974. Or maybe the 1960s.

Can't see it on the graphs because the data from before 1960 is not comparable.

Such a decline in population growth would be evidence of economic decline. Come to think of it, so is the argument that we need to increase immigration in order to boost economic growth. Or maybe that last one is just evidence of the decline of economic argument.

But if the "natural" rate of population growth (which excludes immigration) has declined in response to a declining economy, then the correct response would be to reverse the economic decline. To reverse the decline of population growth by increasing immigration is the wrong response. It camouflages the economic problem and confuses the economic analysis. It does not solve the economic problem.

That's why I'm talking about population.

Sunday, July 2, 2017

The "Natural Rate" of Population Growth?

The population growth rate graph, again:

Graph #1: A Natural Rate of Population Growth?
I put a line on there in red, suggesting what looks to me to be a "natural" rate of population growth since the 1960s, or anyway a rate from which the actual rate is sometimes disturbed and to which it apparently desires to return.

Don't be outraged; it's just an impression.

Anyway, when I look at the blue line after 1960 I see what looks like one particularly large and long-lasting disturbance:

Graph #2: A Large Disturbance beginning around 1990
For some reason, I had in mind that this large disturbance was a result of immigration as opposed to the other thing. I don't know why I thought immigration, but I did. For the longest time.

Maybe I read it somewhere, and then forgot. Anyway, I finally tracked it down and yes, it looks like immigration caused that disturbance. The next graph is part of an image presented by weforum:

Graph #3: from World Economic Forum
There looks to be a pretty consistent uptrend since about 1950 on this graph. But just around 1990 there is one particularly large spike. It shows a tripling, from about 600 thousand to about 1800 thousand immigrants, and it attributes the spike to "IRCA legislation".

I looked it up. IRCA is the Immigration Reform and Control Act of 1986. So yeah, immigration in this case. But I still see it as a disturbance or deviation from the "natural" tendencies which arise as an outgrowth of economic conditions.

Saturday, July 1, 2017

Population growth responds to economic conditions

It is often argued that the economy's performance depends upon population growth. No doubt, but economic forces typically work in both directions and, if that is true, then it is also true that population growth depends upon the economy's performance.

Googling us population historical data excel turns up World Population Data (3) as the first result. Their population.xls file contains a worksheet named US Population Data - Filled in which will serve my purpose. The initial notes say

Before 1960, 10 year census data was filled in assuming constant annual growth during that decade. From 1960, Current Population Survey estimates are used.

So the data for the time of the Great Depression time is not perfect, but I probably won't find anything better. They provide this graph:

Graph #1: From the Population.XLS file
You can easily see a slowdown of population growth from 1930 to 1940. That's gotta be a result of the Great Depression. Malthusian. Here is a plot of the growth rate:

Graph #2: Population Growth Rates, based on the data from Graph #1
You can see the low of the 1930s, a low which supports the view that population growth responds to economic conditions. And you can see the high of the 1950s, likely in part a result of the improved economic conditions of that time.

Diane J. Macunovich writes:

Many factors can influence a couple’s decision to have a child, but a large body of work suggests that economic factors—especially women’s wages and young adults’ relative income—have played a major role in U.S. fertility trends. “Relative income” refers to a person’s earning potential relative to his or her desired standard of living.

If your "desired standard of living" is high, you might be inclined to put off having children and instead devote more time to your career. That would tend to push the economic trend and the population trend in opposite directions. No doubt it's a factor.

I think more in terms of our expected standard of living -- low during the Great Depression, high after a victorious end of WWII. These would tend to push the economic trend and the population trend in the same direction.

Both tendencies exist, no doubt. But it seems to me that major events (like the Great Depression and the end of World War Two) would give a general push in one direction or another. People do always have their own goals and their own desires, but for a large number of people these would tend to average out. So the general trend of population growth in an economy like ours must be subject to the push of major economic events.

Friday, June 30, 2017

The solution is obvious, once the problem is identified

In the baby-sitting co-op story told by Paul Krugman, there was a problem:

... the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary.

Krugman seems to think that the great lesson in this story is that a central bank can

stimulate a depressed economy by reducing the interest rate and cool off an overheated one by raising it.

I think the great lesson is that monetary problems create real problems like recession. The great corollary is that it is difficult to convince people the problem is monetary.

Wednesday, June 28, 2017

On "lifting humanity from the miserable condition"

That's Peter Boettke's phrase, the quote in the title above. Except his exact words were "This is how wealth is created and humanity is lifted from the miserable condition of extreme poverty to one where human flourishing is even possible."

This is my fifth in a row on Boettke's paper.

Here's a graph from Max Roser:

GDP Growth Over the Very Long Run from Max Roser (2014)
That link no longer works. But you can find a whole set of related
graphs at Our World in Data: Economic Growth" from Max Roser (2017)
Max Roser's graph shows both "the miserable condition" (the flatline beginning at Year One) and the "lifting" from that condition (the increase beginning some time after 1653, and ending perhaps 400 years later).

As I asked before:

Which part of Max Roser's graph would you say shows "natural" output?

And my observation:

When a peak rises like that, it's not "natural". It's the result of economic management, coddling, encouragement, and stuff like that.

Thinking otherwise, Peter Boettke repeats the words of his teacher James Buchanan:

“I have often argued that there is only one ‘principle’ in economics that is worth stressing... I refer, of course, to the principle of the spontaneous order of the market, which was the great intellectual discovery of the eighteenth century”.

Here's my problem. If you leave things to "the spontaneous order of the market" you are likely to end up with the flatline. If you want to "lift humanity from the miserable condition" you have to do some lifting: economic management, coddling, and encouragement. At the very least you have to provide a pool of "safe assets" like the public debt of the UK in the 18th century and early 19th.

Many people today say that public debt is the source of our problems. I don't say that. But suppose those people are right about the source of today's problems. If they say the same thing about the economic troubles of the 18th and early 19th, they cannot possibly be right. They can (possibly) be right only if their story changes from one where public debt is beneficial to one where it is harmful, with the change occurring in the late 19th century or early 20th.

But that's a tad off topic. The topic is Boettke and Buchanan's assertion that "the spontaneous order of the market" is the source of all good things.

The assertion is wrong.

Tuesday, June 27, 2017

About the gains from our economically viable choices

Responding to Peter J. Boettke's Don’t Be “a jibbering idiot” PDF.

Toward the end of yesterday's post I pointed out that even though only economically viable options are chosen, the choice does not always help to "lift humanity from the miserable condition." Even if only the most viable options are chosen.

Concentrated gains outweigh widely distributed gains. Concentrated gains tend to lift the few and lower the many. Given the increase of inequality, there is a point beyond which the gains from economically viable choices are not sufficiently distributed to permit us to say that "humanity" is lifted. It is only below this determining point that the distribution of gains assures the lifting of humanity.

The location of the determining point will change as inequality changes.

Then too, the gains themselves change as the economy evolves, becoming generally more pecuniary. Gains that are increasingly pecuniary provide less social advantage, and contribute in their own way to greater inequality.

Beyond that, extreme inequality may cause the economy to change in such a way that the most economically viable options seem to promote something other than the advance of civilization.

Monday, June 26, 2017

Feasible but not viable

After quoting James Buchanan on general equilibrium (see yesterday's post) Peter J. Boettke expands on the thought, saying
This is how the price system impresses upon decision makers the essential items of knowledge required for plan coordination. This is how monetary calculation works to guide us amid a sea of economic possibilities and ensures that among the technologically feasible only the economically viable projects are selected.

Chicago Tribune 14 April 1945
I read that far, and a TOYNBEE flag went off in my head. Among the technologically feasible, only the economically viable projects are selected, Boettke says. Yeh. Only the economically viable.

Toynbee, Arnold J. Toynbee, said the construction of roads and viaducts was abandoned after the fall of Rome because, though such projects were still technologically feasible, they were no longer economically viable.

Note that in the Chicago Tribune story from 1945, Toynbee is quoted as saying "Social malady was the cause" of the abandonment of Roman roads. But he also points out that "a road system of the Roman standard would not have paid its way". Would not have paid its way. In other words, not economically viable.

There is one additional sentence in Peter Boettke's paragraph:
... among the technologically feasible only the economically viable projects are selected. This is how wealth is created and humanity is lifted from the miserable condition of extreme poverty to one where human flourishing is even possible.

Yeah, "humanity is lifted from the miserable condition" because economically viable projects are selected. But it doesn't work all the time. When Roman roads stopped being viable, they stopped being built. But choosing a less un-viable alternative did not "lift humanity from the miserable condition." It only slowed the descent toward misery.

Peter Boettke suggests that the market system drives us to the economically viable. I can see that. But the economically viable option is not sure to "lift humanity". Most often, perhaps it does. In the decline phase of the cycle of civilization, it does not.

Sunday, June 25, 2017

James Buchanan on general equilibrium

James Buchanan, quoted by Peter J. Boettke in Don’t Be “a jibbering idiot”: Economic Principles and the Properly Trained Economist:
A solution to a general-equilibrium set of equations is not predetermined by exogenously-determined rules. A general solution, if there is one, emerges as a result of a whole network of evolving exchanges, bargains, trades, side payments, agreements, contracts which, finally at some point, ceases to renew itself. At each stage in this evolution towards solution, there are gains to be made, there are exchanges possible, and this being true, the direction of movement is modified”.

Sounds like an asymptotic approach to perfection. The "gains" get smaller and smaller as progress is made, until finally the gains add nothing at all. At that point economic nirvana is reached, general equilibrium, and the economy "ceases to renew itself."

In other words, change comes to an end. Yeah, I don't buy that at all. Seems to me the most significant words in the Buchanan quote are "if there is one".

Saturday, June 24, 2017

James Buchanan on markets

Peter J. Boettke of George Mason U, in Don’t Be “a jibbering idiot”: Economic Principles and the Properly Trained Economist, quoting James Buchanan:
“A market is not competitive by assumption or by construction,” Buchanan argued. “A market becomes competitive, and competitive rules come to be established as institutions emerge to place limits on individual behavior patterns.”
Surely this could be understood as support for regulation of, say, financial markets.

Thursday, June 22, 2017

A game for two players

SpaceX's Mars colony plan: How Elon Musk plans to build a million-person city

Elon Musk wants Mars? Sure, because everything on Earth will be owned by Jeff Bezos:

Amazon is buying Whole Foods Market in a $13.7 billion deal

Wednesday, June 21, 2017

The business cycle, bigger

Patterns of Growth and Decline in Western Civilization
Source: Greg Stevens                (Click Graph to Enlarge)

Recommended reading: Western civilization will completely collapse in the next 200 years.

Take that "200 years" as conceptual. Stevens does not say May 4, 2217 is the critical date. He says "I have no equation to give you that will spit out a number!" But determining the exact moment of our demise is not really the point. The point is that the cyclic pattern is a useful tool for thinking about the world.

Tuesday, June 20, 2017

Doublespeak at Bloomberg

Bloomberg: "While the expansion has been normal, 'output has been held back by woeful productivity growth and an unusual decline in labor-force participation'..."

You can't have it both ways. Either the expansion has been normal, or it has not. If output has been held back, then expansion has not been normal.

See Skipping a stone across recent years

Sunday, June 18, 2017

It's like that

As a follow-up to my two previous posts, I want to clarify one point: There is an imbalance between private and public debt, an excess of private relative to public, and economic growth will not improve until the imbalance is corrected.

My theory doesn't need 2% inflation to prop up the economy. And it certainly doesn't need three or four percent inflation to get better growth. I have no need of that hypothesis.

From Unveiling the Edge of Time by John Gribbin:
Newton himself had been baffled by one feature of the behavior of the planets. One planet on its own, orbiting the Sun, would indeed move in a perfect ellipse in obedience to Kepler's laws, under the influence of the inverse-square law of gravity. But with two or more planets, the extra gravitational forces of the planets acting on each other would tug them out of their Keplerian orbits. Newton feared that these effects might lead to instability, eventually tumbling the planets out of their orbits, and sending them either crashing into the Sun or drifting away into space. He had no scientific answer to the problem but suggested that the hand of God might be required, from time to time, to put the planets back in their proper orbits before such perturbations became too large.

In the mid-1780s, however, Laplace proved that these perturbations are actually self-correcting. Using the example of Jupiter and Saturn, the two largest planets in the Solar System, with the strongest gravitational pulls, he found that although one orbit might contract gradually for many years, in due course it would expand again, producing an oscillation around the pure Keplerian orbit with a period of 929 years. This was one of the foundations of what is possibly the most famous remark ever made by Laplace. When this work on celestial mechanics was published in book form, Napoleon commented to Laplace that he had noticed that there was no mention of God in the book. Laplace replied: "I have no need of that hypothesis."

Saturday, June 17, 2017

That tangent again

There is an excess of private sector debt. This creates problems, in response to which public debt has increased. Almost everyone sees and objects to the increase in public debt. Few see and object to the high level of private debt that created the problems and caused the public debt to grow. Those who do see private debt as the problem seem universally to point to faster increase in public debt as the solution. But this solution is not quite right.

Those who call for faster increase in public debt are right in the sense that increasing the public debt reduces the imbalance between public and private debt. But the analysis must not stop there. For in our economy, increases in the public debt lead to greater increases in private debt, making the imbalance worse. So the solution, as I see it, is not to focus on increasing the public debt, but rather to focus on limiting the increase of private debt.

Friday, June 16, 2017

The 2% solution

Neil Irwin is often good. But this post of his from 2014 disturbs me: Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel

How did the 2% inflation target become global economic gospel? Irwin answers that question in the first paragraph, using an interesting twist of language:

Sometimes, decisions that shape the world’s economic future are made with great pomp and gain widespread attention. Other times, they are made through a quick, unanimous vote by members of the New Zealand Parliament who were eager to get home for Christmas.

He completes his answer in the second paragraph:

The practice was so successful in making the high inflation of the 1970s and ’80s a thing of the past that all of the world’s most advanced nations have emulated it in one form or another.

So the 2% policy was created by accident, by politicians less interested in governing than in getting home for the holidays. And 2% policy became the standard by dumb luck: It seemed to work, and everyone got on board.

This is not really good analysis on Irwin's part. He dumps on government, and everybody likes that, so he has an "in" at the start. No doubt there is another side to the story, a more respectable, more respectful side, which Irwin does not cover. Not that there's an audience for that side of the story.

Having created the picture of a shoddy foundation for 2% policy, Irwin proceeds to poke and prod us toward thinking that 2% is no good:

Yet even as the idea of a 2 percent target has become the orthodoxy, a worrying possibility is becoming clear: What if it’s wrong? What if it is one of the reasons that the global economy has been locked in five years of slow growth?

Note that his attack on 2% policy is based solely on "what if".

And again:

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...

What if they had set a higher target.

And again:

“Probably in the abstract had they settled on a somewhat bigger number, that would have been a better choice,” Mr. Blinder said.

That's "what if" in economist-speak.

By now I've criticized Neil Irwin's attack on 2% policy as baseless, and criticized his presentation of the higher-target argument as empty. So maybe you are thinking that I support the 2% policy. I don't. I'm not defending 2%. I'm criticizing Irwin's analysis.

For the record, I don't support 2% inflation. I support zero inflation. But not now, and not as a solution to anything.

Inflation is the economy's way of telling us that it has a problem: Inflation is the economy's way of fixing the problem. When we figure out what the problem is, and fix it, inflation goes away. That's why I favor zero inflation. Because it will be a sign that we fixed the problem.

Now you're mouthing the words "printing money causes inflation" and you think that I think that printing less money will get us to zero inflation. That's not it. Not even close. I did say "When we figure out what the problem is", remember?

To tie off this tangent, let me say what I think the problem is. We use money for money. And we use credit for money. But sometimes we use more money and less credit, and sometimes we use less money and more credit. And by "sometimes" I don't mean Tuesday versus Saturday. I mean, for example, the 1950s and '60s versus the 1990s and 2000s and since. The problem that our economy has is that we use too much credit for money, and not enough money for money. There is an imbalance between money and credit, an excess of credit use, an excess of debt.

There is an excess of private sector debt. This creates problems, in response to which public debt has increased. Almost everyone sees and objects to the increase in public debt. Few see and object to the high level of private debt that created the problems and caused the public debt to grow. Those who do point to private debt as the problem seem universally to point to faster increase in public debt as the solution. But that solution is not quite right.

There is an imbalance between money and credit. There is much credit, relative to money. If we say private debt is a measure of credit, and public debt is a measure of money, then there is too much private debt relative to public debt. This is the imbalance, the monetary imbalance that creates our economic troubles.

Those who call for greater increase in public debt are right in the sense that increasing the public debt reduces the monetary imbalance. But the analysis must not stop there. For in our economy, increases in the public debt lead to greater increases in private debt. This makes the imbalance worse. So the solution, as I see it, is not to focus on increasing the public debt, but to focus on limiting the increase of private debt.

That's not really as bad as it sounds, for we can limit the increase of private debt easily, by encouraging faster repayment of that debt. Policy-makers think credit is good for growth, and they make lots of policies that encourage the use of credit. As a result, our use of credit has increased. But policy-makers have not also created policies that encourage the repayment of debt. So our accelerated use of credit makes private debt grow at an accelerated rate, and no policy does anything to reduce the growth of private debt. This is where policy must be corrected.

So you can see that the optimum rate of inflation is not my main focus. Maybe you can also see that in my view, the 2% inflation target is most definitely not "one of the reasons that the global economy has been locked in five years of slow growth". And that a higher inflation target will not solve the problem.

I'm criticizing Irwin's analysis.

The argument about whether we should double the target inflation rate from 2% to 4% is an argument between two factions unaware that the problem lies elsewhere. Neil Irwin refers to the doubling as setting the target rate "a bit higher", and he quotes Alan Blinder calling 4 "somewhat bigger" than 2. But these misrepresentations do not disprove that 4 is twice as much as 2.

Irwin quotes Laurence Ball saying “Any adverse effects on the economy of having 4 percent rather than 2 percent inflation are trivial compared to the effects of having a horrible recession like we’ve been experiencing.”

Trivial? To whom? To the 99%, yes. To the 1%, no. To the 1%, seeing the value of their money halved in a generation must be no trivial matter. It's hard to sympathize with the 1%, I know. Still, they have the money, and the power that goes with it. So if you want to fix the economy, you'll have to do it in a way they can live with. Doubling the rate of inflation is not it.

Thursday, June 15, 2017

Forder & Friedman v Irwin, RE: 3 to 4% inflation is hardly memorable

Neil Irwin:

...inflation also hovered in the range of 3 to 4 percent through the mid-1980s, hardly remembered as an economic nightmare.

James Forder:

The question [Samuelson and Solow] were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.

Milton Friedman:

it took a century for the inflation in Rome, which contributed to the decline and fall of the empire, to raise the price level "from a base of 100 in 200AD to 5000... -- in other words a rate of between 3 and 4 percent per annum compound."

Wednesday, June 14, 2017

A Moving Target

According to Neil Irwin, Paul Volcker (Fed chairman from 1979 to 1987) liked the idea of zero inflation:

One view was that zero inflation should be the goal — that a dollar today should have the same buying power as a dollar in a decade, or two or three. That was the view embraced by, among others, Paul A. Volcker, the former Fed chairman.

Irwin says New Zealand in 1989 was "the first country to set a formal target for how much prices should rise each year — zero to 2 percent in its initial action." By the end of that paragraph, though, Irwin drops the zero:

A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion.

Then, after noting more recent events, Irwin writes:

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...

So zero, and then zero-to-2%, and then 2%, and now 3-to-4%.

Monday, June 12, 2017

Maybe more links will solve the problem

I thought it was a mistake: three links to stuff about the insufficiency of 2% inflation:

Not a mistake. Apparently, Thoma likes what DeLong and Kocherlakota have to say.

The first link -- Rethink 2% -- is a copy of a letter to the Fed, signed by Kocherlakota and DeLong and Mark Thoma and a bunch of other economists with lots of name recognition. The letter opens with an uninspiring account of our economic troubles:

The end of this year will mark ten years since the beginning of the Great Recession. This recession and the slow recovery that followed was extraordinarily damaging to the livelihoods and financial security of tens of millions of American households. Accordingly, it should provoke a serious reappraisal of the key parameters governing macroeconomic policy.

One of these key parameters is the rate of inflation targeted by the Federal Reserve...

They open with the ten-year complaint? Why would anyone read on, unless to criticize it in a blog post? (Note, for example, that "This recession and the slow recovery" are two things, not one thing; so maybe the letter should say This recession and the slow recovery were damaging rather than "was" damaging. Where is Paul Romer when you need him?) The second paragraph continues:

In years past, a 2 percent inflation target seemed to give ample leverage with which the Fed could lower real interest rates. But given the evidence that the equilibrium interest rate had fallen substantially even prior to the financial crisis, and that the Fed’s short-term policy rate remained at zero for seven years without sparking any large acceleration of aggregate demand growth, a reassessment of this target seems warranted...

So their concern is that two percent no longer provides enough room for rates to fall, should the need arise. And that the "equilibrium" rate has fallen, and that two percent inflation has not solved the problem.

The second paragraph concludes with a call for "moderately higher" inflation.

My problem with the views expressed in the letter is that inflation is not a solution to economic problems. Higher inflation may change the shape of the problem, from one acceptable to the 1% to one acceptable to the 99%, but it does not solve the problem.

You might say that a problem 99% of the people can live with is better than a problem 1% of the people can live with. Okay, but it's still a problem: It's not a solution. Anyway, the 1% of the people have 99% of the money, so they can put things back in their favor easily. We'll get higher inflation for a while, and then we won't, and the problem will remain.

Note that the letter considers it a "given" that the equilibrium rate has fallen. This is unacceptable. According to the letter, the fall in the equilibrium rate appears to be an integral part of the problem. If that's the case, you don't accept it as a "given" and turn to moderately higher inflation as a coping mechanism. No. You investigate the fall in the equilibrium rate. You look at its causes rather than its consequences. And then you explore solutions that might reverse the causes of the fall of that rate.

And that's just for starters. You have to trace the problem to its origin. It is not enough to find the proximate cause of the problem. It is never enough to find the proximate cause.

Mark Thoma's second link is The Fed Needs a Better Inflation Target by former Fed bank president Narayana Kocherlakota.

Kocherlakota opens with a reference to the "Rethink 2%" letter:

Today, a group of economists published a letter urging the U.S. Federal Reserve to consider a monumental change in policy: raising its target for inflation above the current 2 percent.

I signed the letter. Here's why...
His explanation sounds very much like the opening of the letter itself, with its concern about having room for interest rates to fall:

The inflation target helps define how much stimulus the Fed can deliver when it lowers interest rates to zero...

Same page. But Kocherlakota spends the rest of the paragraph explaining his thinking, which is the worst thing a writer can do. He does get in a couple of decent hyphenated terms, but explanations are always dreary. And then Kocherlakota ends the paragraph by explaining that three percent is "a full percentage point" more than two percent. Reminds me of the "six is greater than one" TV commercial.

Kocherlakota writes:

The issue is all the more important because periods of zero nominal rates are likely to be more frequent.

More frequent than in the past.

Why? Because of "a lowering of the 'natural' interest rate consistent with full employment and stable inflation". You know:

the equilibrium interest rate had fallen substantially even prior to the financial crisis
The "given". Again.

So, the same story from two sources. But prob'ly not two sources. Prob'ly one source with two outlets, to make it seem like many people had the same thought independently.

Anyway, Kocherlakota says that the fall of the equilibrium rate

might require the Fed to be at the zero lower bound about 30 percent to 40 percent of the time.

So don't you think we might want to figure out what caused the equilibrium rate to fall, and reverse the causation, and get that rate back up again? But no: Like the letter, Kocherlakota says we should cope with the problem by raising the inflation target.

Kocherlakota again:

Of course, there's also a case against raising the inflation target. That’s why the more important part of the letter is its call for “a diverse and representative commission” to re-examine the monetary policy framework -- a much more open and transparent approach than the Fed usually takes. When the policy-making Federal Open Market Committee (of which I was a member) chose the 2 percent inflation target in January 2012, its deliberations were completely hidden from the public. As a result, the target has little buy-in from the public and Congress.

Bullshit. The 2% target has "little buy-in" because it didn't work.

Mark Thoma's third link is Why the Fed Should Rethink Its 2%/Year No-Lookback Inflation Target by Brad DeLong.

Oh! I thought it was going to be "same pile, different foot" again; but maybe not. DeLong says his contribution to the discussion was "to set out what the arguments on the other side are—and why we do not find them convincing".

Well, good. I'm not "on the other side", but I don't favor raising the interest rate target as a solution to anything, because it isn't a solution to anything. So, maybe DeLong will address my concerns and educate me. We'll see.

DeLong says he sees four "other side" arguments, all of which are wrong. I'll just look at the first one:

"Even at the zero lower bound," the Fed has other tools, and does not need to raise the inflation target. That argument is wrong, DeLong says, because the other tools have not worked. His evidence is the low employment and low production of the past decade.

Okay, but that doesn't mean that raising the inflation target will solve the problem. I'm willing to admit that a sufficiently high inflation rate would probably boost spending and employment and production. But I'm not willing to admit that the low levels of those things are the problem. Oh, sure, they are a problem for people. But you don't fix the economy by fixing people's problems. You fix the economy by fixing the economy's problems. When the economy is working right, people's problems get fixed more or less automatically.

Since the time of Carter and Volcker and Reagan, many things have been done to the economy to "fix" things. Bringing the inflation rate down was only one of those things. Where is DeLong's call for a reversal of all the other things? Why does he only want to reverse the lowering of the inflation rate?

The impediment then was the same as it is today: Economists and policy-makers look at outcomes and try to improve them. What they need to do is look at outcomes and correctly determine the causes of those outcomes. Then maybe they'll have to look upon those causes as if they were outcomes, and chase down their causes. And when they discover the causes, maybe they'll have to do it again. They have to track the problem to its source.

They don't do that. They didn't do it in the Carter/Volcker/Reagan era, and they're not doing it now. As I said, a higher rate of inflation could boost employment and production without solving the problem that made employment and production go low.

No one is saying the problem is that prices are too low. A higher rate of inflation would fix that problem -- but that isn't the problem.

Sunday, June 11, 2017

The cost of debt and the cost of credit are two different things

The title grabbed me immediately: Capital Controls and the Cost of Debt.

Not capital controls. It's the cost of debt that caught my eye. I still don't know what "capital controls" are. I still don't even know what "capital" is. But the cost of debt, yeah, that one I know. So I clicked the link (it's the loader page for a PDF) and read the first sentence of the abstract:

Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads.

I see now how difficult that sentence is to read. Too long. On the first read, the last three words stuck in my head: "corporate bond spreads."

Interest rates. Spreads are interest rates, differences in interest rates. That's not the cost of debt.

Interest rates are the cost of credit, the cost of borrowing. The cost of debt is something entirely different. The cost of debt is the cost of the whole accumulation of borrowings. And the size of that cost depends primarily on the size of the accumulation. Not on interest rates.

Interest rates affect the cost of the next dollar borrowed. That's entirely different.

For example:

These days, the cost of debt is high and the cost of credit is low. That much, I know.

Thursday, June 8, 2017

I can do simplistic, too

At the New York Times N.Gregory Mankiw offers A Tax Cut Might Be Nice. But Remember the Deficit.

Anyone who reduces the problem to taxes and deficits is a complete ass. Yeah, that means most everybody. But maybe it's not Mankiw; maybe it's his editor. Can't say. So I started reading the article to see what I can say.

Mankiw's first sentence includes this question: "Should we have a tax cut that increases the budget deficit?" And his last sentence is "In this era of alternative facts, it would be far too easy to pass irresponsible tax cuts and hand the bill to future generations." So yes, Mankiw reduces the problem to taxes and deficits. Therefore, Mankiw is an ass.

Wednesday, May 31, 2017


Two posts back I said Marcus Nunes was concerned that people would accept the new, lower trend of economic growth and forget the higher trend of the eighties and nineties and naughts. "Forget" was my word. Maybe it wasn't quite right.

But Marcus does say "there´s a wide acceptance of the new trend." People are giving up on trying to get back to that old, high trend. Maybe the word "forget" is not so far off, after all.

In that post I used Marcus's graph, which goes back to the late 1980s and shows the high trend and the low trend, both. My post also quoted Menzie Chinn talking about a trend based on the 1984-2007 period and saying this trend now seems implausibly high. Chinn wants us to forget about the high trend.

I find it interesting that Marcus and Menzie both show the old trend existing since the 1980s. Interesting, because for a long time it was widely recognized that there was an economic slowdown in the mid-1970s, from which we never fully recovered. The older trend, from before the mid-1970s, was even higher than the old trend that Marcus and Menzie show.

Evidently, the older trend is even more completely forgotten. "Abandoned" might be the better word. Let's have a look.

FRED provides the Real GDP data series GDPC1. Menzie Chinn provides the range of dates used to establish the trend. Excel provides an exponential trend line and the trendline equation:

Graph #1: Real GDP (blue) and the Exponential Trend (red) for 1984 to 2007
Showing an exponent of approximately 0.0313, the equation indicates average annual growth of about 3.13% for the 1984-2007 period.

I used the trendline equation to calculate values for the 1984-2007 trend, to extend the trend from 1947 to 2016. Then I showed those values as a red line on a new graph, along with Real GDP. By this method we can see how well the 1984-2007 trend fits the RGDP data for the full 1947-2016 period:

Graph #2: Real GDP (blue) and the 1984-2007 Trend (red) in the 1947-2016 Period
It appears to be a good fit, right up to the problems of 2008. Then Real GDP falls away from the trend and establishes the new, lower trend, as discussed by Marcus Nunes, Menzie Chinn, and others. Even before the 1980s the fit looks good, in the 1970s, and in the late 1960s.

Before about 1965, Real GDP (blue) does run persistently below the 1984-2007 trend (red). It doesn't appear to be off by much. One good way to tell how much it is off is to show a trend line based on those early years on the graph.

According to what Scott Sumner said ("growth in US living standards slowed after 1973"), Ross Perot's graph in yesterday's post, and the observations of others, 1973 seemed to be a good end-date for the early years' trend.

Then, for the start-date, I remembered Marcus telling me he likes to omit the years before 1952 "to avoid the post war adjustment which distorts the data." I like to imitate what I see economists doing, so I went with the 1952 start-date.

This next graph shows the same Real GDP (blue) and the same trend line based on the years 1984-2007 (red) as the graph above. But to gauge the difference visible in the years before 1965, this graph adds an exponential trend line (black) based on the years 1952 to 1973:

Graph #3: RGDP (blue), the 1984-2007 Trend (red), and the 1952-1973 Trend (black)
In the early years, there is not much difference between the trends. But there is a huge difference by the end. Menzie Chinn's 1984-2007 trend brings Real GDP to 20 trillion dollars by 2016. The 1952-1973 trend brings Real GDP to 30 trillion. And Menzie thought the lower of those numbers was an "implausible" outcome!

But what if these are not implausible outcomes?

// The Excel file

Tuesday, May 30, 2017

The previous slowdown in economic growth

Arguing with Paul Krugman, Scott Summner wrote: "I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy."

Sumner accepts the view that the growth in US living standards slowed after 1973.

The classic graph that shows that slowdown is this one from Ross Perot:

Graph #1 Source: Ross Perot, United We Stand
(from when Perot was running for President in 1992)
Before 1973, living standards would double in less than two generations. After 1973 it would take 12 generations for living standards to double.

If a generation is 25 years: Before 1973 it took less than 50 years for living standards to double. After 1973, according to the graph, 300 years.

Scott Sumner says things would have been even worse if not for the Reagan-era reforms.

Perot lost the 1992 election to Bill Clinton, and during the Clinton years the economy improved. (I'm talking chronology here, not causality.)  The "generations required" number came back down, but only for about ten years. Then it went up again. And after that we had the financial crisis and recession, and the "generations required" went up even more.

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.