This is that Similarity graph from the other day, thru 1980:
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| Graph #1: GDP is red, Nonfinancial debt is blue |
This is "Percent Change from Year Ago" for the same data, GDP and Domestic Nonfinancial Sector debt, for all the years:
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| Graph #2: This time GDP is blue, Nonfinancial debt is red. Oops. |
First, look at the low points: They're all blue. They're all GDP, the lows. GDP falls faster than debt. Debt does not fall as quickly as GDP. That's one thing that makes the debt/GDP ratio go up when it goes up (like during the Great Depression).
So if GDP almost always falls faster than debt, but the two lines travel together (as Graph #1 shows they do until 1980) then GDP must also rise faster than debt -- it must, or the two lines would veer apart.
And in the early years on this graph, before 1970 say, the high points are also blue. GDP did grow faster than nonfinancial debt.
But then in the 1970s, the red peaks are right up there with the blue peaks. And in the 1980s there is a gigantic red peak. And another, after 2000.
And in the 1990s, no peaks and no lows. "Moderation" they call that.
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Summary:
Before 1970 there was balance.
In the 1970s, trouble was brewing.
In the 1980s, trouble arrived.
The mid 2000's peak is probably the housing bubble. What is that in the mid 80's? Does it occur in 1986? I've seen other data sets peak in that year, and have no explanation for it.
ReplyDeleteAlso note that, like almost everything else, it shifts for the worse ca. 1980.
JzB
Hi Jazz.
ReplyDeleteA lot of people seem to have taken an interest in the economy since 2007, because of the crisis. Some of their views suggest they think there was no problem in the economy before the crisis. You and I know better.
I agree with you that Reaganomics made things generally worse. But Reaganomics was put in place to solve problems. We cannot just abandon Reaganomics and go back to the way things were, because there were problems in the economy before Reagan, too.
I think that now, with the crisis and all, it is time to admit Reaganomics has failed, and that we need a new analysis of the economic problem. And some new solutions.
But isn't that what you expected me to say?
You could say that Reaganomics started with Nixon , when he dismantled Bretton Woods , a keystone in the post-war economic foundation. Monetary policy was bad prior to Volcker , but maybe this was to be somewhat expected , given the new exchange rate regime and the oil shock. Burns was a total hack though , driven by political pressures to a scandalous degree.
ReplyDeleteThe quadrupling of oil prices had a huge effect even though we imported a smaller percentage back then since gdp was more tightly coupled to oil prices than it is today.
I would argue that there was some need to make modest changes in 1980- even "supply-side" changes - but Reagonomics wasn't modest , it was radical.
The unions needed to be reined in , to a degree , since union wages had started outstripping productivity growth , which was unsustainable. Reagan began the process of decapitating the unions altogether with the firing of the air controllers , as did Thatcher with the miners , and the war against unions has continued apace since. "Mend 'em , don't end 'em " would have been a better response , maybe along the lines of co-determination , as in Germany today.
Lowering top marginal rates modestly , say from 70% to 60% , would have been a reasonable move , but Reagan went to 50% , and ultimately 28%. That made it impossible to ever return even close to the levels we had in the "Golden Age". Reagan set the table for Norquist.
The "Two-Santa" fiscal policy - tax cuts combined with "deficits don't matter" - was a Reagan innovation that , once established , was hard to shake ( though Bush I and Clinton were Scrooges compared to Reagan and Bush II ) , and is coincident with the start of runaway debt levels and current account imbalances.
The U.S. and U.K. were dominant in setting global trends , so the neoliberal paradigm was destined to be the new "thing". We led , they followed , and now we're all lost.
The "problems" surely did begin in the 70's , but were mostly due to the advance wave of neoliberal restructuring , not a failure of the post-war economic model.
BTW , I blame Carter for succumbing to the neolib sirens too ( financial dereg , etc ) , as did Clinton and now , with incredibly bad timing , Obama.
I have some views that I can support to some degree, but inadequately. You touch on three of them.
ReplyDelete1. "Monetary policy was bad prior to Volcker , but maybe this was to be somewhat expected , given the new exchange rate regime and the oil shock."
I heard once on the news, ages ago, that OPEC was only raising prices to make up for the decline of the dollar (relative to gold, maybe). Ever since, that has seemed right to me. As I said, this is a weak and unsupported view, but it makes more sense to me than any theory of "shocks".
Interesting view of Nixon, btw.
2. "The unions needed to be reined in , to a degree , since union wages had started outstripping productivity growth , which was unsustainable. Reagan began the process of decapitating the unions altogether with the firing of the air controllers..."
I'm not gonna argue against your statement on union wages and productivity growth. But if you're talking about the early years of Reagan (and before), you're talking double-digit inflation. I imagine everybody's wages were outstripping productivity back then.
In the 1970s the catch-phrase was "wage-push inflation" and it irritated me no end. If wages were the driving force, I thought, then wage-earners ought to be doing better than everyone else, not worse. This issue remains unresolved in my mind.
My father, a union carpenter, never forgave Reagan for what he did to the air controllers.
3. I don't know what the third one was. Maybe this: "The 'problems' surely did begin in the 70's , but were mostly due to the advance wave of neoliberal restructuring , not a failure of the post-war economic model."
I can go back to my old saw, debt. The growing accumulation of debt, even in the 1960s, meant increasing financial cost to the nonfinancial sector and increasing financial income to the financial sector. Consider finance a factor of production like land, labor, and capital, and you can see that the consequence of accumulating debt is equivalent to the consequence of, say, union wages outstripping productivity growth or OPEC demanding more rent for their oil. Specifically, the growing accumulation of debt created an imbalance between sectors, to the benefit of finance.
The black hole effect makes it worse: Everything comes in, and nothing escapes. Growing financial costs make the nonfinancial sector less profitable, and the financial sector more profitable. People put their money where the profit is, so investment moves out of the nonfinancial sector and into finance. This I think is the driving force behind the growth of finance, which is everywhere else attributed to political factors.
The finance sector clearly grew steadily after WWII , but it looks like the growth in share of gdp started to taper off ~1960 :
ReplyDeletehttp://static.seekingalpha.com/uploads/2011/12/7/saupload_GDP-Share-of-US-Financial-Industry.jpg
Most of that growth was probably driven by home buying , as the baby-boom was developing and middle-class incomes had grown like topsy ( relatively speaking ) :
http://4.bp.blogspot.com/-GSbFx72DUvM/TlQaEfzGTtI/AAAAAAAAABM/uYsICvkfe6U/s1600/home-ownership-rates.gif
The sign that the real money was headed into finance is probably best shown here :
http://stocktickle.com/wp-content/uploads/2010/05/US-financial-sector-wages.jpg
The uptick in dereg activity starts in the Carter years and finance wages turn up a few years later.
You have to keep in mind that while nonfinancial private debt/gdp levels grew throughout the postwar period , it was offset by declining public sector debt/gdp. The financial debt that resulted from the growth of the industry through the 60's to service the homebuilding boom is , IMO , orders of magnitude more benign than the growth that occurred in the '70's and beyond.
To me , the "jump the shark" moment for debt is best illustrated by the private / public sectoral balance breakdown , with the initiation of chronic current account deficits , starting ~1982 ( fig 2 & 3 ) :
http://wallstreetpit.com/8568-the-sector-financial-balances-model-of-aggregate-demand
Anon -
ReplyDeleteI'm in basic agreement with everything you've said.
Art -
As I commented on another recent post, Reaganomics was not put in place to solve problems. It is an extreme (and in my opinion treasonous, but that's off topic) ideology that is totally indifferent to problems.
Cheers!
JzB
On the issue of the contribution ( or lack thereof )of the financial sector to GDP growth , I recommend this paper by T.Philippon ( Nov 2011 ) :
ReplyDelete"Has the U.S. Finance Industry Become Less Efficient?"
http://pages.stern.nyu.edu/~tphilipp/papers/FinEff.pdf
He derives a "financial intermediation cost index" to try to find out if we're getting more bang for our financial buck. Bottom line - we aint't.
A couple of quotes :
" Figure 11 is the main contribution of the paper....There are two main points. The first, and most important, is that the ratio ( i.e. the index ) is remarkably stable. Recall that we started from a series in Figure 1 that fluctuates by a factor of 5 (9% relative to less than 2%)( Note , here he's talking about the variance in the size of the finance share of gdp ). All the debt, deposit and equity series also vary a lot over time. But their ratio, properly scaled, seems quite stable. On Figure 11 it stays between 1.3% and 2.3% over 130 years. Also note that over this period, interest rates, inflation rates, and real growth rates also vary a lot. Thus, however stylized the model might be, it seems to capture something of first order relevance.
The second main point is that the finance cost index has been trending upward, especially since the 1970s. This is counter-intuitive. If anything, the technological development of the past 40 years (IT in particular) should have disproportionately increased efficiency in the finance industry. How is it possible for today’s finance industry not to be significantly more efficient that the finance industry of John Pierpont Morgan? I conclude from Figure 11 that
there is a puzzle. "
and his conclusion :
"The finance industry’s share of GDP is about 2 percentage points higher than the neoclassical growth model would suggest, based on historical evidence. More research is needed to provide evidence on whether financial prices have become more informative, or whether risk management and risk sharing have improved. Otherwise, this would
represent an annual misallocation of about $280 billions, which appears to come from the large trading volume that investors perform."
( my suggestion : to be safe , let's whack it in half , down to about 4% of gdp )