Scott Sumner  

An even greater stagnation

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The government just announced revised real GDP figures for the past few years, showing even lower growth than previously estimated. I am traveling now so I'm going to estimate these growth rates w/o a calculator. Please correct me if I am wrong. Here are the new growth rates for RGDP, Q4 over Q4:

2011: 1.7%

2012: 1.3%

2013: 2.45%

2014: 2.525%

2015: 1.45%. (So far)

A few comments:

1. This surprises me. I would have thought upward revisions were more likely.

2. If I had to guess, I'd say the speed up in 2013 was due to monetary stimulus, and the continued higher rate in 2014 was due to ending the extended unemployment benefits. But the changes are so small that it's hard to have any confidence in those claims.

3. This 4 and 1/2 years of sub-2% growth (on average) occurred during a period of rapidly falling unemployment, and above trend employment growth, which means the trend rate of RGDP growth is FAR LOWER. The Fed still hasn't figured this out.

4. President Obama has done almost nothing (outside trade) to improve the supply-side of the economy, and lots of things to worsen it. Most other recent presidents, of both political parties, make some effort to improve the supply-side fundamentals. On the other hand I think we tend to overrate the importance of presidents, and thus I doubt things would have been much better with another president. The greatest barriers to growth may well be increasing restrictions on immigration and increasing restrictions on property development.

5. I don't think I'll ever be able to understand how the government continues to make such large revisions in estimated GDP, so long after the data has come in.


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COMMENTS (25 to date)
Justin D writes:

My first thought was this actually makes the Keynesian story look a bit more plausible.

The deficit as a % of GDP fell 3.4% from 2012Q2-2013Q2. That compares with a 0.8% decline on average during the 2 years before and 2 years after, suggesting an exogenous decline of roughly 2.4% of GDP. I think if you actually add up the various known exogenous items it is closer to 2%, but this is close enough for our purposes.

Real GDP averaged 0.9% during 2012Q2-2013Q2. During the 8 quarters before and 8 quarters after, real GDP growth averaged 2.3%.

With a multiplier of 1, the counterfactual GDP growth for 2012Q2-2013Q2 needed to only be 3.3%, which is higher than we've experienced during this recovery but no longer difficult to believe.

Considered from a nominal perspective, those quarters saw 2.5% growth, vs. 4.0% on average before and after.

The key weakness of the Keynesian story remains employment. Private sector payrolls grew 2.2% over 2012Q2-2013Q2 (112.0 million to 114.4 million), which is same as the average of 2010Q2-2012Q2 (2.0%) and 2013Q2-2015Q2 (2.4%). Given no discernible employment impact, the weak growth during 2012Q2-2013Q2 seems entirely attributable to a decline in productivity, which doesn't fit well with the Keynesian story (real GDP per private sector worker fell 1.2% between 2012Q2 and 2013Q2).

baconbacon writes:

3. This 4 and 1/2 years of sub-2% growth (on average) occurred during a period of rapidly falling unemployment, and above trend employment growth, which means the trend rate of RGDP growth is FAR LOWER. The Fed still hasn't figured this out.

So when growth was thought to be higher under the QE episodes it was "see easing works" and now that it is reframed lower its "see, the Fed needs to do even more"?

baconbacon writes:

@ Justin:

The key weakness of Keynesian analysis right now is that there is no broadly accepted definition of austerity. If you use a deficit/gdp ratio for measuring austerity/stimulus the results from the start of the crisis are all over the place.

Justin D writes:

With regards to your 3rd point, it's interesting to note that since 2010, real GDP growth (1.9%) has lagged private sector job growth (2.3%). In 2010Q4, there was $137,706 of GDP generated per private sector worker (2009 dollars), today, just $135,664. Even in nominal dollars, the increase was just $140,390 to $148,755.

For the people scratching their heads on why wage growth is so slow, well, there you go.

Justin D writes:

@baconbacon

I agree that is a problem, when I say "key weakness" I meant in the case of explaining 2012-2013 from a Keynesian perspective.

GDP growth in the relevant time period is now sufficiently low that the counterfactual doesn't require us to believe that 4% or 5% GDP growth was going to occur in absence of austerity. So for me, the key obstacle to accepting the Keynesian explanation for 2012-2013 (that is, austerity did have an impact, GDP growth would have been much faster without it) is that job growth remained robust. If anything, I think that 2012-2013 supports Arnold Kling's PSST story, in that despite a slowdown in sales, hiring was ongoing because many positions produce organizational capital rather than widgets and there was no severe breakdown in patterns of specialization and trade.

Massimo writes:

[Comment removed for irrelevance. --Econlib Ed.]

khodge writes:

1. The US economy is still tied to the world economy, especially considering the China slow down.

2. Since you are a monetarist, are you sure you are comparing apples to apples without some adjustment for inflation or lack thereof?

3. Where did you find a machine that can compose and post an article that doesn't have a calculator buried somewhere in the system files?

Andrew_FL writes:

Contemporaneous GDP deflator growth rates, taken from FRED (possibly not up to date?), also Q4/Q4 (except 2015, obviously):

2011: 1.93%

2012: 1.94%

2013: 1.56%

2014: 1.37%

2015: 0.96% (I'm assuming Q2/Q2 is the correct way to do this?)

(Price) inflation has been slowing, though it looks like until recently it was doing so when "real" growth was speeding up.

For a while it looked like the Fed was working with a de facto ~4% nominal growth rate target. If so, they're falling short now, it looks like.

Sam writes:

@Andrew_FL: Scott's number for 2015 is close to what you get by annualizing 2015Q2/2014Q4, which I assume is what he intended. (The correct value is closer to 1.48%, actually).

Sam writes:

Whoops I misread your comment. I thought you were spot-checking his GDP calculations. Ignore my comment above.

Alex writes:

"On the other hand I think we tend to overrate the importance of presidents, and thus I doubt things would have been much better with another president"

Of course they would. The sclerotic growth is the result of tax and above all regulatory explosion under this administration.

Andrew_FL writes:

@Sam-Actually, your comment is actually helpful, even though I wasn't checking his RGDP figures, because I now know what I did wrong in calculating the inflation rate for 2015 "so far"

I can't check at the moment, but I think if I did 2015 to compare apples to apples, the rate would not be quite so low. Still, the Fed has been letting nominal and real growth slow at the same time. Are they putting too much weight on the low U3 unemployment rate?

Sam writes:

Well for 2015, I think they just chose to ignore the low Q1 inflation, writing it off as a fluke of energy prices.

bill writes:

"Of course they would. The sclerotic growth is the result of tax and above all regulatory explosion under this administration."

Just like previous president's policies explain the implosion of the US economy in '08-09?

Noumenon72 writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Michael Byrnes writes:

Tim Duy says this report moves the Fed closer to a September hike:

http://economistsview.typepad.com/timduy/2015/07/gdp-report.html

Scott Sumner writes:

Justin, Good comments, especially about the payroll numbers.

In my view 2013:1 is the most logical date for the start of austerity, as that was when the deficit started falling very fast.

Bacon, Even with the revisions, growth was faster in 2013.

hodge, The key word is "buried". And RGDP growth is more appropriate than NGDP for supply side issues.

Sam and Andrew, Thanks for those calculations.

Alex, Maybe, but I'd guess someone else would have also done poorly---it seems like a global trend.

Gordon writes:

In looking at the nominal GDP numbers in the BEA release (and assuming I didn't miscalculate it), the annualized nominal GDP growth since the Federal Reserve ended QE 3 last year is 2.43%. That's really miserable.

Todd Kreider writes:

Hey Scott,

Please don't write things like this:

2014: 2.525%

We physics guys just roll our eyes. You think you can measure the economy to the ten thousands of a decimal?

(Scott): "The greatest barriers to growth may well be increasing restrictions on immigration and ..."
...
Party at Scott Sumner's house tonight. Dibs on the Guinness and the couch after 1 a.m.
...
Ecclesiastes 5:11 "When goods increase, they are increased that eat them: and what good is there to the owners thereof, saving the beholding of them with their eyes?"
...
1. The Earth's human population cannot grow without limit.
2. The Earth's maximum possible instantaneous human population exceeds its maximum possible sustainable human population.
3. The Earth's maximum possible sustainable human population leaves little room for wilderness or large non-human terrestrial animals.
4. Value is determined by supply and demand. Therefore, a world in which human life is precious is a world in which human life is scarce.
5. The Earth's human population will stop growing when either (a) the birth rate falls to meet the death rate or (b) the death rate rises to meet the birth rate.
6. The Earth's human population will stop growin as a result of (a) deliberate human agency or (b) other.
7. Deliberate human agency is either (a) democratically controlled or (b) other.
8. For every locality __A__ the term "the government of A" names the largest dealer in interpersonal violence in that locality (definition, after Weber).
9. All human behavioral traits are heritable, therefore ...
10. Voluntary programs for population control selectively breed non-compliant individuals.
11. Human misery is like heat; in the absence of barriers it will flow until it is evenly distributed.

Libertarians work to turn Indianapolis into Calcutta and to reduce the value of any one human life to $0.01.

Gene Marsh writes:

"Libertarians work to turn Indianapolis into Calcutta and to reduce the value of any one human life to $0.01."

But impoverishing american workers is not their stated goal.

Helping the least-skilled is their concern.

That fewer benefits and lower wages will improve the lives of the poor would seem to be the single most common libertarian talking point.

So, why are there no libertarian outreach programs to the unemployed and least-skilled, sharing the good news?

Could the libertarian obsession with the minimum wage be about something else, besides helping the poor?

If libertarians were arguing in good faith that wage floors are injurious to workers, we'd expect to see them make that argument to workers.

We'd also expect to see concern about the disemployment effects resulting from other policies.
Like open borders. Where does the pretend concern for the least-skilled worker go when you've switched over to pretending concern for poor immigrants?

Getting rid of the minimum wage and open borders.
What else do those things have in common? Is there some rarely mentioned interest group that might benefit from these two items, or are they simply advocated out of sincere concern for the poor?

tldr; people dislike the fact that libertarians self-righteously posture as if those who support the most brutal dog-eat-dog domestic policies, are the TRUE friends of the poor, while those liberals who appear to authentically care are only trying to ensnare them and signal how great they are. Liberals are only pretending to care. What a confusing inversion.
And the fact that its counter-intuitive makes it seem like a penetrating insight into the truth!

Fred Anderson writes:

@Gene Marsh;
You write, "If libertarians were arguing in good faith that wage floors are injurious to workers, we'd expect to see them make that argument to workers."

I can think of one good reason not to.

When the wages of an unskilled & inexperienced beginner are, by fiat, raised to match those of a more skilled & experienced worker -- let's say someone who's just been through a union's apprenticeship program -- rational employers will fire the unskilled & inexperienced beginners and replace them, at no additional cost, with the more skilled & experienced ones. The unions have long understood this; indeed, one of the original arguments for the minimum wage was to keep Black workers from getting a foot in the door of the (then) lily-white construction industry by offering to work more cheaply.

But if libertarians present this argument, unskilled & inexperienced beginners are probably less likely to receive (and to comprehend) it. And the more skilled & more experienced workers -- who, I'm guessing, are the larger group, anyway -- are more likely to be exposed to, and to comprehend that the minimum wage benefits their group at the expensive of their less skilled & less experienced brethren (& sisters).

I would hesitate to run advertising demonstrating how minimum wage harms the unskilled & inexperienced at the bottom of the wage pyramid for fear of its motivating political support for such laws from the more skilled & more experienced.

ThomasH writes:

On the micro side Obama's policies are mixed, but I think you have to count ACA, which moves somewhat away from the employer "provided" health insurance model and encourages more experimentation in Medicaid providers as a positive. The restriction coal-fired electricity generation is also probably a second best improvement (= what would result in a optimal carbon tax regime). And was not the huge unpopularity with Republicans of "Regulatory Czar" Sunstein's efforts to introduce more use of cost-benefit analysis in Federal rule-making an indication of effectiveness?

But I am really surprised that you do not count the 2009 stimulus as improving growth. Misdirected as some of it was, did it not increase (non-Fed-offset) AD? And without Obama's support would the political pressures on the Fed to tighten monetary policy have not been even greater?

ThomasH writes:

@ babcon

The key weakness of Keynesian analysis right now is that there is no broadly accepted definition of austerity

I agree but the absence of agreement on what constitutes "austerity" is not confined to "Keynesians"

I think that "austerity" should be defined as a negative departure (or a greater departure) from the optimal rule for public investment: carry out projects with discounted NPV greater than zero. Possibly one could specify the rationale for the departure, generally to reduce the deficit or one of its derivatives wrt time.

KirkC writes:

The US is in a similar situation as the rest of the world in regards to population and inflation. Consistent growth is not sustainable. Many countries, especially the US, need to expand their populations in order to continue to grow their GDP. This is more or less a zero sum game in developed countries at the moment. The population is not growing much organically and requires an infusion of people to continue to grow the GDP. This is one reason the US and developed countries are accepting foreign immigrants in the manner they are. It may not be the best approach, but that is a major reason they are so liberal with their immigration policy.

The US has gotten itself in a corner with the expectation for growth. Inflation is a big part of this. Growth in the US does not require inflation, but there is a pervasive theory that it is "necessary". What makes this worse is that the inflation has been pushed to the extreme so much that it makes the thought of deflation unthinkable. Deflation itself is not dangerous to the US economy, but deflation in an economy with too much debt is very dangerous.

I say this because deflation is very much in the cards for the US and other global economies. Many economists are shaking in their boots at the thought of it happening here.
Think about the impact of deflation on the real estate market and how that will affect the US economy. 2008 was a glimpse of what could happen, but think about if deflation has been persistent for 10+ years.

In essence what the problem is with both inflation and GDP expectations is that there is too much debt. The US economy is like a junkie that requires a fix (more debt) to stay "normal". As long as it get its fix, things will seem normal. If the fixes stop, the economy will fall apart. A stable economy is not one that requires a growing population or increases in debt to thrive.

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