slow growth and economists

Why has growth slowed? // What makes someone an economist?

In his piece today on the slowdown in growth, Neil Irwin shows this striking chart:

and he explains its significance as:

"This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent. The economies of Western Europe and Japan have done worse than that.

Over long periods, that shift implies a radically slower improvement in living standards. In the year 2000, per-person G.D.P. — which generally tracks with the average American’s income — was about $45,000. But if growth in the second half of the 20th century had been as weak as it has been since then, that number would have been only about 20,000."

Some economists might argue the chart overstates the slowdown in growth, since the ten-year growth mixes in the level hit of the Great Recession/financial crisis and makes it look like per capita growth has come to a standstill. Personally, I would have been okay if the chart had been animated and yelled "hey, folks this is a big deal" but that's just me.

Here's the chart that an economist might prefer: 4-quarter percent change in real GDP per capita, where the shaded areas are recessions. This chart better separates trend (over many years) and cycle (around recessions). But it also shows a slowdown in recent growth.

So economists will get this all figured out, right? Right? Irwin talked to several "actual economists" ... but no consensus on causes or solutions emerged. Maybe the lack of a clear way forward ... says something about economists? And what insights we have to offer here.

Economists may not be able to predict recessions well but we have a lot to say about what to do in them: cut interest rates, add liquidity, send out stimulus checks, etc. And this is good. The mass job loss, under-used capacity, and heightened anxiety in a downturn have substantial costs. But so does even a quarter point off trend growth, though the pain is not as acute or obvious. Or (maybe) as amenable to the focus and tools of many economists.

And what is that focus of an economist? In my third-year PhD course on research, I was told to "study questions that you have the ability to answer." And this was from a super creative economist. It is true that most economic research is incremental and there are strong fads standards for inquiry in the discipline. (We are not all Akerlofs.) Trying to establish causality is a big deal ... and has added a lot of insight ... but a shift in activity that takes years to show up clearly and is more modest in size can be tricky.

Working at the Fed has opened up the range of questions and tools for me, at least in my policy work. Even so, much of the focus is on the cyclical position of the economy and current conditions. Along the way we study longer trends, but at the end of the day, monetary policy is largely about economic stability, not upgrading growth. To add on to Irwin's car analogy ... it's a bit like the Fed officials having to drive whatever car the rental company sticks them with (on an obstacle course). Of course, reality is not so simple, but it's worth being realistic about policy tools.

To make the cyclical focus a little more concrete ... last year I wrote a FEDS Note about the staff forecasts early in the recession. This was a key takeaway:

"Forecasts by the Board staff for economic activity during the Great Recession proved to be overly optimistic on some dimensions, such as GDP, and yet were appropriately pessimistic on other dimensions, such as the GDP gap (the deviation of GDP from potential output)."

So the cyclical position didn't look so different with time ... a key input to monetary policy ... but the level slipped away. This level miss is shown in another chart in Irwin's piece:

A lot is going on in that chart ... but it's clear that things did not turn out as expected. Can economists "fix" this? No. But we can help: by doing more to study why trend growth has slowed, how extensive and persistent is the slowing, and what might be done now. I don't want to minimize the many research efforts already on productivity, business dynamism, and mobility. Just asking for MOAR.

**Opinions here are mine and should not to be attributed to anyone with whom I work.**


economist - my views here are my own

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We have the same appetite for putting purchasing power in the hands of people who will actually spend as we do for expanding the vote and taking money out of politics.
2016-08-07, john

Fascinating chart! In retrospect, the period from about 1981 to 1985 looks especially interesting. First, you have a deep recession (brought on with Reagan's blessing by the Volker-led Fed), followed by a strong recovery. Yet since then, the GDP peaks have been consistently below trend, while the valleys have been at least deep (if not deeper). Maybe there's a connection between lower growth and the rise of center-right political parties and neo-liberal economics over the past few decades -- a trend that would include not only the US but most of Europe and Japan as well. Put another way, maybe this is what a plutocratic-rentier economy (as opposed to an entrepreneurial economy) looks like.
2016-08-07, bill

Nice article and I agree with bill. Economists sometimes fail to appreciate the importance of finance in particular. For example, why is it the U.S. does not have a central bank? Why don't economist study the potential effects on the economy if such a public bank injected $500 billion in debt free liquidity into infrastructure in 2017? No debt issued at all. Where's that study? I'd sure like to see it.
2016-08-07, Chris Herbert

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