Tuesday, December 20, 2016

"Let us not forget that real GDP growth in 1984 was 7.3 percent"

The post is near two years old -- Obama's federal debt dwarfs Reagan's by Sierra Rayne (Wow, does that name sound made up!) at American Thinker.

The article challenges a Washington Post claim that "it is hard to believe he [Obama] could increase the debt by as large a percentage as Ronald Reagan did." It's not my idea of an important topic. But the article does some arithmetic to make its case, and I find that sort of stuff interesting. So.

Here's the part that stuck in my craw:

Factor in higher rates of population growth, inflation, and economic growth under Reagan versus Obama, and it becomes obvious that nominal total debt comparisons are meaningless. Let us not forget that real GDP growth in 1984 was 7.3 percent; the next-highest value since was just 4.7 percent in 1999.

Let us not forget that real GDP growth in 1984 was 7.3 percent.

I went back to the article three times because of that statement. What the hell, one fluke year of suspiciously good growth, that's their evidence? Granted, there is more to their argument than that. They said a bunch of stuff about the Washington Post stats. But to see what I think of that, I'd have to go back and do my own evaluation. And the topic just doesn't hold my interest. So I'm left with the 7.3 number, and here we are.

What could possibly account for a year of real GDP growth with a 7.3% growth rate? I mean, we're not China. And yes, I did go to FRED to check the stats Sierra Rayne provides. The numbers are right.

So what can explain that moment of good growth, good enough to bring up Reagan's otherwise unimpressive stats?

1. Productivity is always high after recession
2. The recession was double-dip
3. Expectations are ephemeral

1. Productivity is always high after a recession

Productivity is always high after a recession. We even had one of those shining moments after the 2009 recession, financial crisis notwithstanding. Have a look:

Graph #1: Productivity goes high after a recession -- after every recession
It's a high one, that post-crisis peak.

I showed this graph before. It's still true, though, that productivity goes high after every recession. So let me evaluate Reagan's high score.

The average of all the data values shown on Graph #1 is two-point-two. That is, a 2.2% annual increase in productivity, on average, for 1948Q1 thru 2016Q2.

But if you only figure the first high peak after each recession, the average is 5.3%. That's three-point-one percentage points higher than the 2.2% average. (And if you look at the 1980s on the graph, a lot of the productivity numbers are below the 2.2% average.)

So I want to say that maybe half of the 7.3% real GDP growth number for 1984 is attributable to the simple fact that it was the first growth spike following a pretty severe recession.

2. The recession was double-dip

It was a "double-dip" recession, by the way, and the post-recession productivity spike after the first "dip" was cut short by the second dip. Did you notice how low the 1981 peak is? I'm thinking that some of the productivity from the first dip didn't have time to work itself out, got saved up, and contributed to the spike that followed the second dip.

Based on annual data for the years 1948 thru 2015, the growth rate of real GDP in 1981, between the two dips, was 2.6%. The growth rate in 1984, the peak after the double-dip recession, was 7.3% (as Sierra Rayne noted). The average of the two is just under 5%.

For the whole 1948-2015 period, the average for "first peak following recession" is 5.4% real GDP growth. So the 7.3% number from 1984 stands out, unless you figure in the "other" first peak from that double-dip recession. Figure in both peaks, and you're almost half a percentage point below the overall first-peak average. So then you would have to say the Reagan boom was below average.

3. Expectations are ephemeral

If you're old enough to remember the 1980 Presidential election, you'll remember there was an awful lot of support for Ronald Reagan. Four years later, with our economy in the midst of its 7.3% RGDP moment, Reagan was campaigning for his second term and talking up Morning in America.

Reagan, and apparently everyone else, thought Reagan had solved the economic problem. The long dark night of the dismal economy was behind us, they thought. Better times had come at last, they thought.

Many people shared the optimism. Expectations were high. You can see those expectations in business investment, gross private domestic investment, here:

Graph #2: Percent Change in Real Business Investment
Investment went high as the 1982 recession was ending, and stayed high for a year. Expectations were at max, and this business investment boom was a result of it.

But it didn't last. After the first quarter of 1984, investment was already dropping off. And look how low investment was for the rest of the 1980s! Even lower than it was in the Bush years, until, you know.

In the Bush years, the bottom gave out. In the Reagan years, it was expectations that gave out. Before expectations fell, they did a good job of propping up the economy for about a year. But you really can't expect more than that from expectations. Unless the expectations arise from an actual good economy, of course. Which, in the 1980s, they did not.

1 comment:

The Arthurian said...

I know, I know: Someone who calls himself "the Arthurian" says the name Sierra Rayne sounds like somebody made it up.