Sunday, July 7, 2013

You were saying about a bubble?

If you look at the path of RGDP since 1983 it is easy to imagine a straight-line trend for the last 30 years, with a "bubble" arising in the late 1990s and popping in 2008:

Graph #1: Inflation-Adjusted ("Real") GDP for the last 30 years

It's a good story that makes us feel better about that sharp drop there in 2008. Like it's not really a sharp drop, just a return to normal.

We used to talk about the trend since 2009 as "the new normal". Now it's just "normal".

I don't mean to rain on your parade, but Graph #1 is not a log graph. It's just a normal graph. A straight-line trend on a normal graph shows declining growth. Even if the blue line on Graph #1 was perfectly straight, it would show declining growth. You need a log graph. A straight-line on a log graph shows steady growth. Like this:

Graph #2: The Same Inflation-Adjusted GDP on a Log Scale
Looks like RGDP grew at about the rate shown by the red line from 1983 to 2000, but declined after the 2001 recession, declined even more in the 2008 recession, and has not recovered.

There's no bubble to be seen on Graph #2. And Graph #2 is the better look at growth.

So what this means is, the bubble story is bull. There was no bubble. And people are telling bubble stories to make themselves feel better because we cannot get growth back up to where it was between 1983 and 2000. Capiche?

Now, get out the big umbrella, because the rain is getting worse. We're only looking at RGDP since 1983. We ought to be looking at it since the 1950s and '60s, when the economy was good. That's what Jude Wanniski said, the economy was good in the 1950s and '60s.

Actually, what he said was "you have to have lived in the 1950s and 1960s to have experienced a good economy."

The trend line for growth in the 1950s and '60s would be higher than the red line on Graph #2, and going up faster. I don't have that on a log graph. But I have it on a normal graph, where a constant rate of growth looks like an upward-curving line. From mine of 28 November 2012:

Graph #3: Inflation-Adjusted GDP and Long Term Growth Trends
The red trend line is the actual RGDP trend, before 1980. The green trend line is the actual RGDP trend since 1980 (and before the financial crisis). RGDP (blue) hugs the trend lines.

Now, you were saying something about a bubble?


Jazzbumpa said...

Where does graph 1 come from, and with whom are you arguing?


The Arthurian said...

Maybe I should add: There may have been a bubble in housing. There was no bubble in GDP.

The Arthurian said...

Oh hey Jazz. Your comment was in the spam filter.

:) I'm arguing with Lambert (July 4, 2013 10:51 pm) here, who said: "The bubble really started towards the end of 1997."

There are two graphs, one a copy of the other, with a trend line eyeballed in. I use HTML and stuff to change the display when the mouse hovers over the graph.

Jazzbumpa said...

There was definitely a bubble in net worth in the previous decade, and housing is a big component of NW.

See Graph 3 here.

But there was no bubble in spending, hence no bubble in GDP.


The Arthurian said...

Well said, Jazz.

But have you seen people talking about "the bubble" lately like it was a GDP bubble? I know I've seen it but I can't place it. James Bullard maybe and David Altig. Even Felix Salmon. Maybe I'm seeing things.

Jazzbumpa said...

I haven't seen that, but you read more and more widely than I do, and this is one of my two busiest times of the year.

I could very easily be missing it.


Jazzbumpa said...

From Salmon:

"In other words, in order to keep up a steady rate of GDP growth, we had to saddle ourselves with ever more cheap and dangerous debt."

I'm not sure how much I agree with that statement. There are productive and non-productive uses of debt. [Note this is not the same as profitable/nonprofitable to the debtor.]

I'm thinking that debt used to finance rent-seeking ventures such as the vast majority of speculative tail chasing that now dominates the economy is non-productive. There are probably FRED series that get at this, but I'm too tired to do anything with it right now.


The Arthurian said...

Yeah I didn't like that like either, from Salmon. Because we didn't have a "steady rate of GDP growth". And the phrase "cheap and dangerous" contains more fireworks than meaning, for me.

Some people who see a GDP bubble:

Felix Salmon: "It makes sense that if we needed ever-increasing amounts of debt to keep up that long-term GDP growth rate, then when the growth of the debt market stops, our potential growth rate might fall significantly.
I’m glad that we’ve finally put an end to the credit bubble..."

WTF Finance: "WTF Finance believes that the United States is in a massive GDP Bubble as the current GDP does not reflect a productive Nation with a balanced economy but a consumer Nation overextending itself on credit."

Tim Iacono: "What Rajan is suggesting above is that policymakers may have misdiagnosed the problem – that the mid-2000′s demand wasn’t really sustainable demand – and, as a result, they are now applying the wrong solution by trying to close this “output gap” via more money printing and more government debt."

Matthew Yglesias should be embarassed by this graph.

Greg said...

I find it astonishing that these people cant put two and two together. They admonish our consumers for overextending themselves on credit, call credit cheap and dangerous and are thankful that our credit bubble might be ending!!?? Do they not know that there IS NO OTHER OPTION in our current system? The only way a person can get money is either borrow from a bank or get paid by someone else who has borrowed from a bank. Either way the credit market must grow for money to enter the economy. That is how our private bank run credit economy has worked for nearly 80 years.

Now, Im all in on a plan to radically change that but these guys act like there is currently an option for the average person and they simply need to exercise it. This couldnt be further from the truth. What we are seeing is not a bug but a feature.

Oh and BTW guys, this GDP bubble you see, YOUR INCOME is part of it too!! If we'd never done what you are admonishing us for your income wouldnt be what it is either.