Wrong Problem

Background post: Economic Performance: The Record.

Old Krugman, May 24, 2010, 3:31 pm:

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.

I went looking there, there, there, and at my regular hangout.

May 22, 2010: Krugman paraphrases Richard Green, saying "growth has actually been slower since the big rightward shift circa 1980." And he shows a graph of median family income suddenly slowing down circa 1968.

May 23, 2010: Same graph, and this note: "...if you look at income per hour it’s actually worse than the median income."

May 24, 2010: Well, here's something:

Scott Sumner says that I’m wrong about taxes, regulation, and growth, because although American growth has slowed since deregulation and all that, the growth has been better than we might have expected.

We can try to parse whether that’s true — but in any case it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies...

So then, Sumner:

For those of you not old enough to remember 1980, let me explain... There was garbage piling up in the streets of London. Britain had been the sick man of Europe for decades, growing far more slowly than Germany, France and Italy. The US wasn’t doing as badly, but certainly wasn’t doing that well either. We had also been growing much more slowly than Europe and Japan...

Krugman makes the basic mistake of just looking at time series evidence, and only two data points: US growth before and after 1980. Growth has been slower, but that’s true almost everywhere. What is important is that the neoliberal reforms in America have helped arrest our relative decline...

...neoliberal reforms lead to faster growth in real income, relative to the unreformed alternative.

Yep: Scott Sumner says American growth has slowed since deregulation and all that, but that the growth has been better than we might have expected otherwise had.

Then, finally, some meat. Sumner says:

The neoliberal revolution occurred precisely because growth was slowing almost everywhere in the 1970s and 1980s, and after 1980 growth slowed the most in those countries that reformed the least.

And this:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

As for myself, I'm not denying that Supply Side economics helped boost the supply side. I'm just saying it didn't solve the problem.


On a related note, I have a problem with Scott Sumner's analysis. Growth was slowing in the 1970s, Sumner says.

Sure, because the Fed kept creating recessions to slow things down. Because of the inflation.

But the problem was not that growth was slow. Slow growth was a policy goal in the 1970s. If growth was slowing in the 1970s, it was a policy success. It is utterly wrong to turn that around now and pretend that slow growth was the problem.

Sumner is analyzing the wrong problem. They all are.