Sunday, May 29, 2011

The Limbo before 1980

Graph #1: This is Graph #9 from mine of 22 May

This is Graph #9 from mine of 22 May. If you follow the fast-dropping trend line from the start, the fall slows down gradually before ending (after a few wiggles) in 1980 or '81. After that, there were new policies in place and the trend line looks different. So let's just look at the first part of the thing.

Graph #2: The first half of Graph #1

Boring. Let's zoom-in closer, to 1965-1981.

Graph #3: The last half of Graph #2

Oh... Okay. The falling trend line is interrupted by the near-recession of 1967... and again (but less) by the actual recession of 1970... and again (pretty severely) by the pretty severe recession of 1974. But then the 1980 recession seems to have no effect.

But no, that's not true. A response to the 1980 recession is visible in the change that occurs between 1979 and 1980 on the graph. So that's three recessions out of three in the 1965-1981 period, plus one near-recession. I think we can say with confidence that recessions have some effect on the trend line of this graph.

And that only makes sense. Because the trend-line goes down when non-federal debt -- private debt, say -- is growing faster than the federal debt. And that doesn't happen during recessions.
Private debt grows faster when the economy is growing.
Federal debt grows faster when the economy ain't growing.
So the trend line of these graphs is in a sense an indicator of economic growth. The greater the down-slope, the better the economy. The greater the up-slope, the worse.

The Limbo after 1980

Graph #4: The last half of Graph #1

Now here is a roller-coaster! It doesn't even look like the same data.

There is a general and quite severe uptrend from 1980 to 1995. This would indicate that economic growth was not particularly good.... But that doesn't seem quite right. Growth was certainly better then than in the 2007-2010 period where again there is a severe uptrend.

So let me take another look. There is a severe uptick associated with the 1982 recession; okay, this fits the rule that "The greater the up-slope, the worse the growth."

Then there is a flat spot, 1983-1989. People generally say the economy was quite good in those years. Note that the fiscal policy of the time called for abnormally large federal deficits (by the standard of that time). In other words, there was a conscious policy effort that drove the trend-line up. And the fact that the trend line goes up so gradually in those years says that private debt grew very nearly as fast as the federal debt. Well, there ya go: That rapid increase in private debt was the source of the economic growth of the period.

Next on the graph, from 1989 to 1994, there is a long and dramatic uptrend in federal debt relative to non-federal, but not much of a recession. This up-trend is due in part to continued federal deficits. But I think it is also due in part to reduced growth of private-sector debt, a result of tax-law changes that I have noted in previous posts.

In any event, by 1995 we reach a high point in the trend line, and so there is some space for the trend to fall for a time. There is slack. The trend line falls from 1995 to 2001, and then again to 2007.

The 1995-2001 decline is associated with the balancing of the federal budget and with an expansion of private debt during the good years of the late 1990s -- the years that Jazzbumpa calls a "bronze" age.

The 2004-2007 decline may be associated with the Bush tax cuts, but I have not looked in to that.

Last but not least, the massive spike of 2007-2010 is associated with the Great Recession.

Tax policies and other factors play into it, but the trend line of the Limbo graph has a clear relation to the quality of economic growth.

The trend line of Graph #1 before 1980 shows a gradual transition from rapid decline (rapid economic growth) to less-rapid decline, to no decline at all and terrible economic growth.

The graph is a growth gauge, and another measure of credit efficiency.

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