Sunday, January 29, 2017

You don't just show a graph and assume that the trend it shows will continue forever

Menzie Chinn takes a look at President Trump's goal:

Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate.
(From the Trump-Pence website)

Professor Chinn shows a graph of Potential GDP which suggests that Trump's target is out of reach. This FRED graph shows the problem: Basically, Potential GDP would have to reach twice the level projected by the CBO. That ain't nothin.

As you may remember, though, I have been predicting economic vigor since last March. So you know where I'm coming from. Before any Trump anything, I was expecting vigor in GDP growth. And now we have Trump.

The vigor that I expect, arising from changes in monetary balances, will add to whatever vigor President Trump can get from his policies, so that economic growth might exceed the President's growth target. And wouldn't that be something.

But this is not a post about economic vigor or Donald Trump. This post is about Menzie Chinn's evaluation of a growth target.

Professor Chinn's Figure 1 strongly suggests that Trump's target is out of reach. His Figure 2 shows RGDP from the late 1940s to the present, with Trump's growth targets appended, to "place into historical context what a 3.5% or 4% growth rate looks like":

Econbrowser Figure 2: RGDP and Trump Targets
Chinn follows the graph with this observation:

... it seems unlikely to have acceleration of growth to the indicated rates...

The post was later updated. But the above observation was Menzie Chinn's conclusion at the time that I offered this reply:

The purpose of Figure 2 seems to be to show that the 4% claim is ridiculous. The RGDP growth rate for 1996-2000 was over 4% if my eyeball is working right. It wasn’t ridiculous then.

Another commenter, Bruce Hall, had a reaction similar to mine:

With the exception of the last decade and the “oil shock”, Trump’s target doesn’t seem quite so absurd.

Let me try again to express my reaction: You can't just show a graph of the economy not doing well for most of the last fifty years and use it as evidence that the economy will continue to do poorly. The graph shows evidence of what happened, not of what's going to happen.

I look at graphs all the time. I always want to know what happened, and why, and what was going on with monetary balances in the meanwhile. Then I try to read the tea leaves the economic forces and see what those forces might imply about the future.

You don't just show a graph and assume that the trend it shows will continue forever.

Am I reading too much into Chinn's post? I don't think so. I think he is using innuendo to make his point; innuendo demands that the reader put words in the writer's mouth. Bruce Hall and I put similar words in Professor Chinn's mouth.

But let me check my work. Figure 1 in the post shows the "contributions to annual Potential GDP growth" -- contributions from "labor force" and "labor productivity". I think this approach is called "growth accounting". I found it fascinating.

Following Figure 1, Menzie Chinn notes the large growth gap that must be made up if Trump is to hit his targets. Then he says:

For more on the growth accounting approach, see Dan Sichel’s EconoFact memo on this subject.
So I followed Menzie's link to Sichel's EconoFact memo. In the first paragraph, this:

Some of Trump's policy proposals, such as tax cuts and infrastructure spending, indeed could boost growth over the next couple of years. Such a boost would lift living standards and be a welcome change for all Americans. But ongoing growth, not just a short spurt, is required to continue raising living standards. The arithmetic of growth, and the experience of the past half-century, suggest it unlikely that sustained growth of this magnitude is possible.

The experience of the past half-century suggests it unlikely that sustained growth of this magnitude is possible.

You don't just show a graph and assume that the trend it shows will continue forever.

1 comment:

The Arthurian said...

My post is a response to Menzie Chinn's of 25 Jan 2017.

See also Menzie's of 20 Feb 2016
and in particular the comments on that post.