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Thursday, May 26, 2011

Does This Ease Your Worries?: US GDP from 1870-2008

I just posted this at MoneyWatch:

Does This Ease Your Worries?: US GDP from 1870-2008: As you can see from this picture, historically we've always recovered from recessions. Eventually. But as you can also see from the Great Depression, recovery has not always been immediate -- the source of Keynes famous "In the long-run we're all dead."

I am confident that we'll return to trend this time as well, the question is how long it will take us to get there. At this point -- with the worrisome signs in recent data -- it's not looking to be anywhere near as fast as we'd like (source):

Log GDP
Click here for a larger, clearer picture

The graph only goes through 2008. Here's a picture of more recent data (note the dates Lucas uses at the top of the graph to date the recession):

Log GDP update
Click here for a larger, clearer picture

Again, though we are beginning to grow at trend rate again and that's better than the free fall we were in, there is a lot of ground to make up. That requires a period of growth in excess of trend, and there's nothing to indicate that will happen anytime soon. [And it will be even slower if we begin cutting the deficit too soon.]

This looks about right to me (though I should note that in the past these forecasts have been overly optimistic):

Frbsf-fore

And the recovery of employment is likely to be even slower. So we will get back to trend. But it will be awhile before we get there.

[Note: The first two graphs are from a talk Robert Lucas gave at the University of Washington (I found it here - click on the graph). I mostly agreed with the outline of the talk until the bottom of page 35 where Lucas asks in regard to the slow recovery, "Is this because government isn't spending enough," and on page 36 where he answers (based partly on page 25):

  • Believe it is more accurate to say that the problem is government is
    doing too much
  • Again, I see analogies to the U.S. of the 1930s
  • Likelihood of much higher taxes, focused on the “rich”
  • Medical legislation that promises large increase in role of government
  • Financial legislation that assigns vast, poorly-defined responsibilities
    to Fed, others
  • Are these conditions that foster a revival in business investment, consumer
    spending?

I don't think that's right. It's not the lack of confidence fairy that is holding things back, it's lack of demand and that's the problem we need to fix.]

Update: Brad DeLong comments.

    Posted by on Thursday, May 26, 2011 at 12:42 AM in Economics | Permalink  Comments (53)

          


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