Monday, July 23, 2012

Economic Performance: The Record

I found this old post (dated 7 March 2011) on my 'development' blog, where I put ideas together and check my spelling and stuff. Apparently I never posted this one. I'm ready now.

By the way: I do not accept for one second the old Time magazine claim that the "skillful" economics of the time had anything to do with the economy's performance. However, I do accept that the economy's performance was very good at the time.

In addition, let me emphasize the view implicit in Paper Money, that stagflation has nothing to do with raging inflation. Stagflation is the occurrence of inflation even during recession -- a "hybrid" outcome, Smith calls it.

For source information on some of the excerpts, hover over the text.

Magnificent Success
"You have to have lived in the 1950s and 1960s to have
experienced a good economy." -- Jude Wanniski, 1995

My economics, my explanation of the economic problem, paints a picture. It shows a history of the U.S. economy that goes back to when times were good.

In the Robert Lucas post, I quoted Wikipedia: Lucas "challenged the foundations of macroeconomic theory (previously dominated by the Keynesian economics...)." That's part of the picture.

The six decades since World War II flake out as three decades of Keynesian economics followed by three of Reaganomics or (as I call it now) Wanniski-nomics. The three of the Keynesian era include two good ones -- the '1950s and '60s -- and the not-so-good '70s.

The festering of the not-so-good gave us Robert Lucas and Jude Wanniski and Ronald Reagan and Reaganomics. Wanniski-nomics. Things got better for a while then. But of course there was the debt. And now, after thirty years of Wanniski-nomics, things are not so good anymore.

And of course, there is the debt.

Magnificent Success
Highlights from an article in Time magazine, 31 December 1965:

In Washington the men who formulate the nation's economic policies have used Keynesian principles not only to avoid the violent cycles of prewar days but to produce a phenomenal economic growth and to achieve remarkably stable prices. In 1965 they skillfully applied Keynes's ideas—together with a number of their own invention—to lift the nation through the fifth, and best, consecutive year of the most sizable, prolonged and widely distributed prosperity in history.

By growing 5% in real terms, the U.S. experienced a sharper expansion than any other major nation. Even the most optimistic forecasts for 1965 turned out to be too low. The gross national product leaped from $628 billion to $672 billion—$14 billion more than the President's economists had expected. Among the other new records: auto production rose 22% , steel production 6% , capital spending 16% , personal income 7% and corporate profits 21%. Figuring that the U.S. had somehow discovered the secret of steady, stable, noninflationary growth, the leaders of many countries on both sides of the Iron Curtain openly tried to emulate its success.

Says Budget Director Charles L. Schultze: "We can't prevent every little wiggle in the economic cycle, but we now can prevent a major slide."

A slide, of course, is not what the U.S. Government's economic managers have been worrying about in 1965; they have been pursuing a strongly expansionist policy. They carried out the second stage of a two-stage income-tax cut, thus giving consumers $11.5 billion more to spend and corporations $3 billion more to invest. In addition, they put through a long-overdue reduction in excise taxes, slicing $1.5 billion this year and another $1.5 billion in the year beginning Jan. 1.

If the nation has economic problems, they are the problems of high employment, high growth and high hopes. As the U.S. enters what shapes up as the sixth straight year of expansion, its economic strategists confess rather cheerily that they have just about reached the outer limits of economic knowledge. They have proved that they can prod, goad and inspire a rich and free nation to climb to nearly full employment and unprecedented prosperity. The job of maintaining expansion without inflation will require not only their present skills but new ones as well. Perhaps the U.S. needs another, more modern Keynes to grapple with the growing pains, a specialist in keeping economies at a healthy high. But even if he comes along, he will have to build on what he learned from John Maynard Keynes.

Time's praise was a kiss of death. As America's Adam Smith wrote in Paper Money:

That was the high point. The dragons of inflation and unemployment began to snort in their caves, and 'stagflation,' an awkward beast, a hybrid of inflation and stagnation, roamed without serious natural enemies. Cynics said there were two sure signs that the Keynesian era was waning. One was that Time magazine put Keynes on its cover....

In his 1987 book Alan Blinder, a member of the Council of Economic Advisers in the Clinton era, wrote:

Unfortunately, macroeconomics has been in utter disarray since the Keynesian consensus broke down in the 1970s.

Blinder's view was shared by Robert Heilbroner, who expanded on the thought:

Keynesianism was the economics of the world from around 1940 through the 1970s, but in the 1960s and 1970s came this extraordinary and quite unexpected inflation. And that took the bloom off the [Keynesian] rose. The Keynesian schema, which had tremendously wide acceptance, had no theory of inflation.... Since then, no new view that anyone can agree on has emerged, and there has been a vacuum in terms of a defining picture of what the hell economics is.... In the history of economic thought there has never been such a prolonged period of intellectual disagreement.

So this was my picture of the economy: Unprecedented success, until an indefatigable inflation arose; this inflation resulted in failure; and then disarray. Unprecedented growth in the 1950s and 60s -- the "golden age" -- followed by inflation and stagflation and slow growth in the 1970s, results that undermined Keynesian thought and policy. And then the patchwork called Reaganomics.

Right or wrong, this was my picture of economic performance since the second World War.

And then one day, there was Krugman:

Did The Postwar System Fail?

I’ve been posting about the contrast between the popular perception on the right that America had slow growth until Reagan came along, and the reality that we did fine pre-Reagan, in fact better; see here, here, and here. And what I’m getting as a common response — including from liberals — is something along the lines of, “That’s all very well, but by 1980 the postwar system was clearly failing, so what would you have done instead of Reaganomics?”

Which all goes to show just how thoroughly almost everyone has been indoctrinated by the current orthodoxy.

He included a little graph to show that "The Ford-Carter years look no worse — in fact, somewhat better — than the Bush years, especially if you look from business cycle peak to business cycle peak."

Krugman's post is from last May. Ten months ago. This has been bothering me for a while now, notions like "America had slow growth until Reagan came along" and "we did fine pre-Reagan." And the argument that the 70s were no worse than the Bush II years. And the rejection of the view that "by 1980 the postwar system was clearly failing." I started to doubt my picture of economic performance.

I might argue that the economy was up in the 1950s and '60s, down in the '70s, up in the '80s and '90s, and down again in the 2000's. That would fit Krugman's graph into my picture. But all was up in the air.

Was my picture distorted? Was Krugman's? Was it true, as Krugman says people say, that growth since the '80s has been good? Was it true, as Krugman says, that the Bush years as bad as the 1970s?

The most basic question was: What about growth? What happened with growth? Was there a golden age, a bad decade, and a great moderation thereafter? What does the history of our economic performance look like?

It came to a head, finally, after I came upon Stuart Staniford's Growth Was So Faster in the Post War Years. Staniford shows a log graph of long-term "Real Per Capita GDP" and says, "it's hard to read changes in small growth rates on a log graph."

He continues:

If we instead go to the BEA data, and compute the CAGR (compound annual growth rate) over the thirty year period 1950-1980, it was 3.63%, while the 30 year period 1979-2009, it was 2.66% (2010 is not available yet). So the last thirty years are a whole percentage point lower growth. And that's despite the earlier period including the very rough years of the 1970s.

I liked that, because it fits my picture: excellent growth in the 1950s and '60s, "rough years" in the '70s, then some improvement. But I want a better breakdown. How does the improvement since the '80s compare with the '50s and '60s? And how do the Bush years compare with the '70s?

Staniford then graphs "the ten year CAGR for the decade prior to each year," which shows the early decades significantly better than the later ones. But I have trouble matching up the years with the performance values on this graph.

The best fragment in Staniford's post was "CAGR (compound annual growth rate)." In a follow-up comment, he provided the calculation for CAGR. And, given the name of it, I could Google for more. Found some useful stuff.

I need to know. It can't be ambiguous.

I need my picture of history to be true, for I can explain it. I can explain the growth of the 1950s and '60s, the stagflation of the 1970s, the improvement of the 1980s and '90s, the decline and crisis.

I need this history to be true, or I need to know that it isn't.

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