One Big Splash

Marcus suggested that the "golden age" was no more than a few good years in the early 1960s, the result of "rising spending (NGDP)" that soon "managed only to make inflation roar" -- an interpretation that rests on Milton Friedman's famed prediction, if ever there was one.


(That's the post that irked me. I felt that Marcus was undermining my argument by claiming there was no such thing as the Golden Age.)

Separately, John Quiggin suggested that the "great moderation" might be a "myth", and Marcus got irked. I think he felt Quiggin was undermining his argument.

Marcus offered this graph:

Marcus's graph

He wrote:

Leaving aside the ‘Bouncing 50s’, the successful policies of President Kennedy´s CEA, first chaired by Walter Heller and having people like James Tobin and Arthur Okun (Paul Samuelson was an outside advisor), took RGDP back to trend by 1965. The faith in ‘fine-tuning’ – the ironing-out of even minor fluctuations – ended up leading them to keep nominal spending (NGDP) growing on a rising trend. Rising inflation was the outcome, leading to “The Great Inflation” (“G.I.”). (Notice RGDP is systematically above trend)

My comment to Marcus was that, given the death of Keynesian economics in the 1970s and the rise of Reaganomics in the 1980s, it didn't make sense to use a trend line "based on the combined economic performance of 'before 1980' and 'after 1980'." There might be two different trend lines, I said, or there might even be a deceleration, a secular slowing of economic growth.

Marcus responded:

It´s more or less recognized that US RGDP is trend stationary (maybe that´s changed now!), with real growth averaging about 3.3% from the early 50s to 2007. Given that empirical ‘fact’, what I did was regress the log of RGDP on a constant and trend up to 1997 and project to 2012.
I start the period in 1952 to avoid the post war adjustment which distorts the data. For example, in 1950 real growth was 13.4%! For the rest of the 1950s, real growth averaged 3.1% with a very high s.d. (3.3) which compares to an average growth of 3.2% and s.d. of 1.5.from 1984 to 2007.

Let me take his response one piece at a time.

First, I think "trend stationary" is a technical term, related to the unit root thing: If RGDP lacks a "unit root" then RGDP tends to return to trend, and in that case RGDP is said to be "trend stationary".

Marcus says, "It´s more or less recognized that US RGDP is trend stationary". In other words, economists think RGDP tends to return to trend. And (if I have it right) this all depends on RGDP being a "linear stochastic process". So I guess that's why the trend is always assumed to be linear. A straight line. Which I doubt is the case.

Then Marcus says maybe that's changed now! Maybe economists are doubting that RGDP lacks the unit root. Doubting that RGDP tends to return to trend. As Christiano and Eichenbaum write: "Following the important work of Nelson and Plosser (1982), numerous economists have argued that real GDP is best characterized as a stochastic process that does not revert to a deterministic trend path."

So maybe RGDP does not tend to return to its linear trend, Marcus admits. Or maybe the trend changed, as I said, or maybe there is a long-term slowdown. Marcus is not disagreeing with me here. Basically, he's just sticking to the old story. Out of inertia, maybe. He's defending his work by relying on the quote fact unquote that RGDP tends to return to trend. Even though, as he says, that fact is in doubt.


Here's the second piece of Marcus's explanation again:

I start the period in 1952 to avoid the post war adjustment which distorts the data. For example, in 1950 real growth was 13.4%! For the rest of the 1950s, real growth averaged 3.1% with a very high s.d. (3.3) which compares to an average growth of 3.2% and s.d. of 1.5.from 1984 to 2007.

Oh, I agree: Adding a few data points, or omitting a few data points, can sometimes make a huge difference. And sometimes there are good reasons for omitting data points. Marcus offers a good reason, but I'm not sure it applies.

If we're talking about economic performance in "the ‘Bouncing 50s’" then isn't it reasonable to include all of the 1950s? I mean, first, we choose to use a decade to define our boundaries. And second, we throw out the biggest splash of the decade!

By Marcus's numbers, even without the one really high spike of 1950-51, real growth in the 1950s was still nearly as good as it was for 1984-2007. Put the outlier back into the calculation, and we'd see better growth in the 1950s for sure.

Anyway, as Jerry puts it in an email:

starting in 1952 is sneaky because it starts on the downslope, so you get the "bad half" of a cycle but not the "good half"...so i think that is a dirty trick.

I got lucky. When I went looking for Marcus's 13.4% I found it right away. The FRED series GDPC1 (data for Real GDP). Quarterly data. Percent change from year ago. Bingo! It's the first really high spike on this graph:

Date %ΔRGDP 1948-01-01 2.9 1948-04-01 4.9 1948-07-01 5.6 1948-10-01 4.2 1949-01-01 1.1 1949-04-01 -1.1 1949-07-01 -0.5 1949-10-01 -1.6 1950-01-01 3.8 1950-04-01 7.4 1950-07-01 10.4 1950-10-01 13.4 1951-01-01 10.3 1951-04-01 8.9 1951-07-01 6.8 1951-10-01 5.2 1952-01-01 4.9 1952-04-01 3.3 1952-07-01 2.0 1952-10-01 5.2 1953-01-01 6.1 1953-04-01 6.7 1953-07-01 5.4 1953-10-01 0.4 1954-01-01 -1.9 1954-04-01 -2.5 1954-07-01 -0.8 1954-10-01 2.8 1955-01-01 6.3 1955-04-01 7.9 1955-07-01 8.1 1955-10-01 6.6 1956-01-01 3.1 1956-04-01 2.2 1956-07-01 0.8 1956-10-01 1.8 1957-01-01 2.9 1957-04-01 1.9 1957-07-01 3.0 1957-10-01 0.3 1958-01-01 -3.0 1958-04-01 -2.2 1958-07-01 -0.9 1958-10-01 2.5 1959-01-01 7.5 1959-04-01 9.5 1959-07-01 6.9 1959-10-01 4.8 1960-01-01 5.1 1960-04-01 2.0 1960-07-01 2.3 1960-10-01 0.6 1961-01-01 -1.0 1961-04-01 1.3 1961-07-01 2.8 1961-10-01 6.3 1962-01-01 7.5 1962-04-01 6.7 1962-07-01 6.0 1962-10-01 4.1 1963-01-01 3.6 1963-04-01 3.8 1963-07-01 4.8 1963-10-01 5.3 1964-01-01 6.3 1964-04-01 6.2 1964-07-01 5.6 1964-10-01 5.1 1965-01-01 5.3 1965-04-01 5.5 1965-07-01 6.2 1965-10-01 8.5 1966-01-01 8.5 1966-04-01 7.4 1966-07-01 6.0 1966-10-01 4.3 1967-01-01 2.7 1967-04-01 2.4 1967-07-01 2.5 1967-10-01 2.5 1968-01-01 3.7 1968-04-01 5.4 1968-07-01 5.3 1968-10-01 5.0 1969-01-01 4.5 1969-04-01 3.0 1969-07-01 3.0 1969-10-01 2.0 1970-01-01 0.3 1970-04-01 0.2 1970-07-01 0.4 1970-10-01 -0.2 1971-01-01 2.8 1971-04-01 3.2 1971-07-01 3.1 1971-10-01 4.5 1972-01-01 3.5 1972-04-01 5.3 1972-07-01 5.5 1972-10-01 6.9 1973-01-01 7.7 1973-04-01 6.5 1973-07-01 4.9 1973-10-01 4.2 1974-01-01 0.7 1974-04-01 -0.2 1974-07-01 -0.7 1974-10-01 -2.0 1975-01-01 -2.3 1975-04-01 -1.8 1975-07-01 0.8 1975-10-01 2.5 1976-01-01 6.2 1976-04-01 6.1 1976-07-01 4.9 1976-10-01 4.3 1977-01-01 3.2 1977-04-01 4.4 1977-07-01 5.8 1977-10-01 5.0 1978-01-01 4.1 1978-04-01 6.1 1978-07-01 5.3 1978-10-01 6.7 1979-01-01 6.5 1979-04-01 2.6 1979-07-01 2.3 1979-10-01 1.3 1980-01-01 1.4 1980-04-01 -0.8 1980-07-01 -1.6 1980-10-01 -0.1 1981-01-01 1.6 1981-04-01 2.9 1981-07-01 4.4 1981-10-01 1.2 1982-01-01 -2.5 1982-04-01 -1.2 1982-07-01 -2.7 1982-10-01 -1.4 1983-01-01 1.5 1983-04-01 3.2 1983-07-01 5.6 1983-10-01 7.7 1984-01-01 8.5 1984-04-01 7.9 1984-07-01 6.9 1984-10-01 5.6 1985-01-01 4.5 1985-04-01 3.6 1985-07-01 4.2 1985-10-01 4.2 1986-01-01 4.2 1986-04-01 3.7 1986-07-01 3.1 1986-10-01 2.8 1987-01-01 2.4 1987-04-01 3.1 1987-07-01 3.0 1987-10-01 4.3 1988-01-01 4.2 1988-04-01 4.4 1988-07-01 4.1 1988-10-01 3.7 1989-01-01 4.1 1989-04-01 3.6 1989-07-01 3.9 1989-10-01 2.7 1990-01-01 2.8 1990-04-01 2.5 1990-07-01 1.7 1990-10-01 0.6 1991-01-01 -1.0 1991-04-01 -0.7 1991-07-01 -0.3 1991-10-01 1.0 1992-01-01 2.6 1992-04-01 3.0 1992-07-01 3.6 1992-10-01 4.3 1993-01-01 3.4 1993-04-01 2.9 1993-07-01 2.4 1993-10-01 2.7 1994-01-01 3.5 1994-04-01 4.3 1994-07-01 4.4 1994-10-01 4.2 1995-01-01 3.4 1995-04-01 2.2 1995-07-01 2.4 1995-10-01 2.0 1996-01-01 2.5 1996-04-01 4.0 1996-07-01 4.0 1996-10-01 4.4 1997-01-01 4.5 1997-04-01 4.3 1997-07-01 4.7 1997-10-01 4.3 1998-01-01 4.5 1998-04-01 3.9 1998-07-01 4.0 1998-10-01 5.0 1999-01-01 4.9 1999-04-01 4.8 1999-07-01 4.8 1999-10-01 4.8 2000-01-01 4.2 2000-04-01 5.4 2000-07-01 4.1 2000-10-01 2.9 2001-01-01 2.3 2001-04-01 1.0 2001-07-01 0.6 2001-10-01 0.4 2002-01-01 1.6 2002-04-01 1.5 2002-07-01 2.3 2002-10-01 1.9 2003-01-01 1.5 2003-04-01 1.8 2003-07-01 3.0 2003-10-01 3.9 2004-01-01 4.1 2004-04-01 3.9 2004-07-01 3.0 2004-10-01 2.9 2005-01-01 3.3 2005-04-01 3.1 2005-07-01 3.1 2005-10-01 2.8 2006-01-01 3.0 2006-04-01 3.0 2006-07-01 2.2 2006-10-01 2.4 2007-01-01 1.2 2007-04-01 1.7 2007-07-01 2.5 2007-10-01 2.2 2008-01-01 1.6 2008-04-01 1.0 2008-07-01 -0.6 2008-10-01 -3.3 2009-01-01 -4.5 2009-04-01 -5.0 2009-07-01 -3.7 2009-10-01 -0.5 2010-01-01 2.2 2010-04-01 3.3 2010-07-01 3.5 2010-10-01 3.1 2011-01-01 2.2 2011-04-01 1.6 2011-07-01 1.5 2011-10-01 1.6 2012-01-01 2.0

I think Marcus's story here is unacceptable. I mean, I'm saying growth in the 1950s was pretty good. Marcus, after dismissing 1950s growth in at least two posts, takes the data for the 1950s, throws out the best growth, and still ends up with growth that is nearly as good as during the Great Moderation.

If Marcus threw out the *lowest* growth and still the 1950s growth was low, well okay. I'd have to think maybe I was wrong and Marcus was right. But he threw out the highest growth, and the result he gets still looks like what we have learned to think of as pretty good growth.

There was a lot of inflation-fighting going on in the 1950s, by the way. Which reduced the growth of the 1950s. The economy was vigorous then, despite policy.

And that is exactly my point. It was a golden age.


Where Marcus's numbers show a difference is not in growth but in the "standard deviation". I won't pretend to know a lot about that. But the help in Excel says

The standard deviation is a measure of how widely values are dispersed from the average value

And Marcus says

“Volatility” is measured by the standard deviation (of spending (NGDP) growth and inflation. Popularly, how “widely” they bounce around.

In other words, during the Great Moderation the standard deviation would have been low. And during times of higher volatility, like the 1950s, it would have been higher. So when Marcus points out the "very high s.d." of the 1950s, and the much lower "s.d. of 1.5.from 1984 to 2007", I want to say, "So what? Vigor is volatile!"

I'd take good growth and a high S.D. any day, over a low S.D. and lousy growth!