Friday, January 3, 2014

Brad DeLong's Once and Future Ages of Diminished Expectations

Below is a substantial excerpt from Brad DeLong
I. Once and Future Ages of Diminished Expectations
Back in 1990 Paul Krugman wrote a little book--a very nice little book--called The Age of Diminished Expectations. The central point was that the long era of more than a century during which Americans could expect 2%/year growth on average in their real per capita incomes and standards of living was over. This era stretched back to the immediate aftermath of the Civil War. This era saw each generation attain a level of material wealth and well-being twice that of its predecessors: 2%/year growth for 35 years is a doubling. And, Krugman wrote, the slow growth from 1973-1990--during which real GDP per worker had been a mere 1%/year--was a harbinger of a new, more pessimistic future: an age in which Americans' formerly-great expectations of the future would have to be diminished.

FRED Graph St Louis Fed 4

Two years after the book was published, the American economy entered a phase in which growth in output per worker roared back to 2%/year and stayed that way for a decade and a half. I was only one of those who thought in the early 2000s that we might even shift to a phase in which our new normal was 2.5%-3.0%/year in average real GDP growth--and that would be 3.0%-4.%/year in total real GDP growth.

FRED Graph St Louis Fed 2

But now, after the financial crisis, in the Lesser Depression, after four years of substantially sub-par recovery, there is great talk that the great era of 2%/year growth in output per worker is over, that America's future expectations are diminished, and that our long-run economic future is, well, not-so-great.

That is the opening of a much longer post which reviews the thoughts of three economists on why we don't get growth. I'm not the least bit interested in those thoughts; I see our inability to grow as a cost problem or, more specifically, a cost-of-debt problem. I'm not looking for answers to that question.

I present DeLong's opening for its analysis of per-worker output. First time I've seen it done that way, and done so well.

But let me go off topic for a moment here, and just go off. After DeLong's opening, the first of the three thoughts he considers is Brink Lindsey's Why Growth Is Getting Harder. Here's a bit of the excerpt DeLong provides:

For over a century, the trend line for the long-term growth of the U.S. economy has held remarkably steady... Consider the four constituent elements... Over the course of the 20th century, these various components fluctuated.... The fluctuations, however, tended to offset each other.... In the 21st century... all growth components have fallen off simultaneously.... It is difficult to resist the conclusion that the conditions for growth are less favorable than they used to be.

"It is difficult to resist the conclusion that the conditions for growth are less favorable than they used to be."

Stroke of genius, that.

Here, read this again.

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