Update: I accidentally said my right-axis was growth acceleration when it was rate, please forgive the mistake: it doesn’t change my point. At this point after a recession we should be seeing much more robust growth. Tabarrok rightly notes growth is persistent, but that’s not good enough after a terrible demand shock.
Alex Tabarrok has a post, American Austerity (and Growth). As you can see, I couldn’t think of a better title so I went with a permutation thereof. Read it. Also, read Brad DeLong on why our short-run a) isn’t as short as it used to be, and b) sucks. Now, my turn.
Tabarrok cites this graph to show why austerity isn’t bad:
This graph is clipped at 1990, so we get to see the pattern only after three recessions. Here’s the same graph with a little more scope and where the right-axis has the acceleration of growth from the ’70s:
It kinda looks the same. But suddenly it’s a lot more sobering. After a bad recession, the growth rate should accelerate to close the output gap. Quarterly growth hits (roughly) 8%, 7%, 5%, 8%, 5%, 5% after every recession. It barely ever falls below 4% except during a recession (and this is expected). This is also proportional to the depth of a recession. But after this one it has barely hit 2%. In fact, eyeballing it, the red and green lines are pretty well correlated except during the ’90s. This was an exception. We had great supply-side stuff going on with trade, but I’ll get back to that.
It has barely hit a non-recession trough. That means growth is picking up slower today than it did during the dot-com bust. And growth deceleration was never as bad as -4% since the Great Depression. Standard models say it should act like a rubber band, and the hard shock would be followed by steady growth. But Brad DeLong is right, the short-run really sucks.
Tabarrok’s graph is selective. The human eye can’t really tell what growth should look like with such a noisy line. But if we look at the flatlined growth it is pretty clear current growth isn’t enough.
But the comparison Tabarrok makes with Bill Clinton forgets some important differences:
I assume that by very bad policy what Krugman means is a policy that is likely to have very bad effects. Hence, I have added to Krugman’s graph the growth rate of real gdp (annual rate). I don’t see the very bad effects. In the 1990s growth was strong even while “austerity” was increasing (falling red line). More recently, we have seen a big increase in austerity according to Krugman and his measure but although there has been no boom, growth has remained modest.
Ok, so here are a few reasons why the ’90s are different from today:
- Huge free lunch from NAFTA and Rubinism in general.
- The employment-population ratio was 10% higher than it is.
- The cost of capital was actually high.
- Long-term unemployment was not a problem.
- People had the balls to predict “Dow 36,000” despite crappy interest rates. (By which I mean high).
Today, long-term growth expectations are abysmal. And if people look at my modification of Tabarrok’s graph it’s not hard to see why. If the economy after a bad recession can’t perform as well as it did heading into its last recession something is seriously wrong. And whatever it is, austerity is not helping. Citing Scott Sumner’s post isn’t any help because he doesn’t even consider the counterfactual with more stimulus. It’s a meaningless statement – except those conditioned that austerity isn’t too bad.
But now consider DeLong’s post. A glass of red wine will do:
I think it is a safe bet that our government will and should spend a greater share of national income in the future. We have a “mixed economy”–neither overwhelmingly private nor overwhelmingly government, but a balance. In six areas government appears to do a better job than private–in defense, in basic research, in infrastructure, in education, in health insurance, and in old age pensions. There are also compelling reasons for government to redistribute income to compensate for the very important role that luck plays–most especially the luck in choosing the right parents–in determining lifetime income.
But he’s being nice. The situation is a lot worse than he paints it out to be. I’ll take an example today’s market monetarists will love. They rightly blame inflation targeting regimes understanding the endogenous fragility to supply-shocks. If we’re targeting inflation at 2% aggregate supply collapses, we have to deflate something else to maintain the inflation, that is tolerate a demand shock.
Now consider what DeLong thinks is the government’s comparative advantage: defense, education, health insurance, and pensions. What do we know about the first three. Inflation is above trend for each. This means, if the government keeps its proportional spending constant, it gets relatively less each year. So by “targeting” a level of government spending, we’re forced to “deflate” the real output of government.
But here’s something worse. Not only is government spending not growing, it’s declining as a percent of GDP. If your Econ 101 teacher ever told you “cost-push inflation is bad”, now is the time to remember that. Because prices are increasing and output is falling.
I’m also tired of the Keynesians who talk about the sequester in terms of multipliers. That isn’t even the big problem. It’s the immediate effect of not spending that money. Cancer patients without care. Children without daycare. Single parents without food.
Oh, and, did you hear? Congressmen without airplanes.
As the FAA fix taught us all, this is about one thing only: the fundamental dismantling of the welfare state. This is a supply-side problem. There’s huge human capital deprecation as the baby boomers retire. The gap between our net and gross incomes will grow as the state of our students deteriorates, as our roads get crappier. This is the time for a supply-side revolution if there ever was one. Ronald Reagan would agree.
Edit: Here’s Justin Wolfers with some jolly good news: