## Wednesday, May 31, 2017

### Remembering

Two posts back I said Marcus Nunes was concerned that people would accept the new, lower trend of economic growth and forget the higher trend of the eighties and nineties and naughts. "Forget" was my word. Maybe it wasn't quite right.

But Marcus does say "there´s a wide acceptance of the new trend." People are giving up on trying to get back to that old, high trend. Maybe the word "forget" is not so far off, after all.

In that post I used Marcus's graph, which goes back to the late 1980s and shows the high trend and the low trend, both. My post also quoted Menzie Chinn talking about a trend based on the 1984-2007 period and saying this trend now seems implausibly high. Chinn wants us to forget about the high trend.

I find it interesting that Marcus and Menzie both show the old trend existing since the 1980s. Interesting, because for a long time it was widely recognized that there was an economic slowdown in the mid-1970s, from which we never fully recovered. The older trend, from before the mid-1970s, was even higher than the old trend that Marcus and Menzie show.

Evidently, the older trend is even more completely forgotten. "Abandoned" might be the better word. Let's have a look.

FRED provides the Real GDP data series GDPC1. Menzie Chinn provides the range of dates used to establish the trend. Excel provides an exponential trend line and the trendline equation:

 Graph #1: Real GDP (blue) and the Exponential Trend (red) for 1984 to 2007
Showing an exponent of approximately 0.0313, the equation indicates average annual growth of about 3.13% for the 1984-2007 period.

I used the trendline equation to calculate values for the 1984-2007 trend, to extend the trend from 1947 to 2016. Then I showed those values as a red line on a new graph, along with Real GDP. By this method we can see how well the 1984-2007 trend fits the RGDP data for the full 1947-2016 period:

 Graph #2: Real GDP (blue) and the 1984-2007 Trend (red) in the 1947-2016 Period
It appears to be a good fit, right up to the problems of 2008. Then Real GDP falls away from the trend and establishes the new, lower trend, as discussed by Marcus Nunes, Menzie Chinn, and others. Even before the 1980s the fit looks good, in the 1970s, and in the late 1960s.

Before about 1965, Real GDP (blue) does run persistently below the 1984-2007 trend (red). It doesn't appear to be off by much. One good way to tell how much it is off is to show a trend line based on those early years on the graph.

According to what Scott Sumner said ("growth in US living standards slowed after 1973"), Ross Perot's graph in yesterday's post, and the observations of others, 1973 seemed to be a good end-date for the early years' trend.

Then, for the start-date, I remembered Marcus telling me he likes to omit the years before 1952 "to avoid the post war adjustment which distorts the data." I like to imitate what I see economists doing, so I went with the 1952 start-date.

This next graph shows the same Real GDP (blue) and the same trend line based on the years 1984-2007 (red) as the graph above. But to gauge the difference visible in the years before 1965, this graph adds an exponential trend line (black) based on the years 1952 to 1973:

 Graph #3: RGDP (blue), the 1984-2007 Trend (red), and the 1952-1973 Trend (black)
In the early years, there is not much difference between the trends. But there is a huge difference by the end. Menzie Chinn's 1984-2007 trend brings Real GDP to 20 trillion dollars by 2016. The 1952-1973 trend brings Real GDP to 30 trillion. And Menzie thought the lower of those numbers was an "implausible" outcome!

But what if these are not implausible outcomes?

// The Excel file