About that slow growth in the 1970s

I'll begin by repeating what I quoted a few days ago.

Back in 1983, in Oil and the Macroeconomy since World War II, a young James Hamilton opened with these thoughts:

The poor performance of the U.S. economy since 1973 is well documented:

    1. The rate of growth of real GNP has fallen from an average of 4.0 percent during 1960-72 to 2.4 percent for 1973-81.
    2. The 7.6 percent average inflation rate during 1973-81 was more than double the 3.1 percent realized for 1960-72.
    3. The average unemployment rate over 1973-81 of 6.7 percent was higher than in any year between 1948 and 1972 with the single exception of the recession of 1958.

This decade of stagnating economic performance ...

The Federal Reserve dealt with high inflation (Hamilton's #2) by raising interest rates until recession resulted. The low output growth (#1) and high unemployment (#3) noted by Hamilton were consequences of the Fed action.

"Recession per year" was higher in the 1970s

Year	RGDP
1960	3108.7
1970	4722.0
1980	6450.4

A quick check shows an RGDP increase of about 51.9% during the 1960s versus 36.6% during the 1970s. The 1960s were easily the better years for RGDP growth. So we could jump to the conclusion that Hamilton is right: The 1970s were a "decade of stagnating economic performance". But I'm not much of a jumper.

Hamilton really wasn't comparing decades. He compared the years from 1960 to 1972 to the years from 1973 to 1981. This graph shows 1973 to 1981, his "slow" years:

Graph #1: RGDP During James Hamilton's "Slow" Years, 1973-1981

I see three recessions in those nine years. No wonder he finds the economy slow.

This next graph shows 1960 to 1972, the "good" years that Hamilton compares to the "slow" years:

Graph #2: RGDP During James Hamilton's Good Years, 1960-1972

Two recessions this time. There's less "slow" time in these thirteen years than in the nine years Hamilton calls slow. There are more "good" years in Hamilton's good years than his bad years.

Well, that makes sense, I guess.

Okay, but look at it this way: In the 13 years of Hamilton's good decade, there are 21 months of recession. That works out to about 1.5 months of recession per year. In the 9 years of Hamilton's bad decade, there are 28 months of recession. That's about three months of recession per year. Twice as much. His bad decade has twice as much recession per year as his good decade.

Sure. It makes sense that the slow decade would have more recession and less growth.

Okay, okay, but think about it this way: More than 86% of the months in Hamilton's good decade are good months. But less than 75% of the months in his bad decade are good. And almost 26% of the months in his bad decade are bad, but only about 13% of the months in his good decade are bad. No matter how you count 'em, his bad decade has more bad months than his good decade, and his good decade has more good months than his bad decade.

You know, it does make sense when you look at it that way.

Yeah, but it just doesn't sit right. James Hamilton appears to be comparing growth in two time periods and finding that one period had far better growth than the other. But we really can't tell how good the growth was, because the mix of growth and recession in the two periods is so different.

Hamilton is not comparing growth to growth. He's comparing arbitrary chunks of the business cycle -- growth, recession, transition phases, everything.

Have you ever seen one of those graphs that show a comparison of recessions? Those graphs align recessions on their start dates, and compare the length and depth of the downtrends. A good comparison of growth would use a similar methodology.

"Recession per year" was higher because of policy

Hey, the economy is the economy. You take one chunk of years and compare it to another chunk of years. The one with more growth and less unemployment is the winner.

Yeah, but no. James Hamilton's slow decade has more recession per year because of policy. It's not that the economy was slow in the 1970s. It's that policy made it slow intentionally.

When a good economy gets to be too good it starts to show inflation. Policymakers respond to inflation by raising interest rates to slow the economy. If the inflation is intractable or unusually high, policy might easily slow the economy enough to create a recession. When that happens, the high unemployment and slow growth that result are consequences of policy.

To point out such a time and call it a "decade of stagnating economic performance", as if the problem was slow growth, is just plain wrong. We have seen slow growth in the years after the 2008 recession. It is nothing like the stop-and-go economy of the 1970s. When it was "go" in the 1970s, growth was strong. The problem in the 1970s was not that growth was slow. The problem was that policy caused a doubling of the "recession per year" number, and did so because growth was too good.

The economy was good in the 1960s, and inflation arose. Policy put a stop to that in the 1970s. In the 1970s, Hamilton's slow decade, recessions were created by policy. Knowing this, you cannot compare the 1970s to the 1960s and announce that growth was slow in the 1970s. It doesn't do justice to the facts.

If you want to evaluate growth, you ought not compare arbitrary chunks of years. When you're evaluating recessions you don't use arbitrary chunks of years. You use the recessions. This is obviously the correct approach when comparing recessions. How is it not obviously correct to use the times of growth when one is comparing times of growth?

Remember, too, the recessions of Hamilton's slow decade were created on purpose to slow inflation. Or, created by accident maybe, but created by policy nonetheless, in order to slow things down.

If and when recessions are natural phenomena, rather than imposed by policy, maybe it would make sense to compare arbitrary decades of economic history. But recession is a policy tool and, in the battle against inflation, slow growth is the policymaker's weapon of choice.

It may be informative to compare growth of a healthy economy to growth in a period when the intent of policy is to reduce growth. But to conclude from such a comparison that the latter period shows "stagnating economic performance" is surely without justification.

Evaluating Growth

Why were there more recessions in James Hamilton's slow decade? Because there was more need to fight inflation in James Hamilton's slow decade. Why was economic growth (on average) slow in that decade? Because it was policy to slow things down.

The question that must be asked is: How good was the growth?

I want to answer that question by looking at the growth phase of the business cycle:

Graph #3: Growth during the sparse Good Years of Hamilton's Slow-Growth Period

The blue line (which is partially hidden by the red line) shows Hamilton's slow-growth decade, from 1973 to 1981. I show in red the part of that period that I evaluate for growth. It runs from the start-of-increase on exit from the 1974 recession to the start-of-slowdown before the 1980 recession. The recessions are visible on Graph #1.

I put an exponential trend line on the red data. The exponent of the trend line formula indicates a growth rate of 1.25% per quarter for the period. The growth rate for the full 1973-1981 period would, of course, be less.

On the next graph we see in blue (again, partially hidden by the red line) Hamilton's decade of good growth, from 1960 to 1972. In red is the part of that period for which I evaluate growth. It runs from the start-of-increase coming out of the 1960 recession to the start-of-slowdown before the 1970 recession. The recessions appear on Graph #2.

Graph #4: Growth During the Good Years of Hamilton's High-Growth Period

The exponential trend line fitted to the red data shows a growth rate of 1.28% per quarter for the trend period. This is slightly more than the trend growth rate observed for Hamilton's slow decade.

I made a copy of Graph #4 and added the slow-decade growth trend from Graph #3. The growth-phase trend of Hamilton's good decade, shown in black, and the growth-phase trend of his slow decade, shown as dashed green, are compared on Graph #5:

Graph #5: The Trend Growth for Hamilton's Good Decade (black) and his Slow Decade (green)

Comparisons of recession align the recessions at their start points. This comparison of growth aligns the trends by using the value 2953.4544 in the equations for both lines.

Comparisons of recession examine differences in depth. Here there is no "depth" to consider, for we are looking at growth, not recession. But there is little difference in trend growth between Hamilton's two periods, anti-inflation policy notwithstanding.

Comparisons of recession also examine differences in length. The trend period for Hamilton's slow decade includes 16 quarters. The trend period for his good decade covers 36 quarters. The growth phase of the good decade is more than twice as long.

Remember, though, that the recessions of the 1970s were created by policy, and that growth fades before recession starts. In the 1970s, policy made growth fade.

Conclusion

I often look at aggregate numbers. People tell me information is lost by looking at aggregates. Important details are lost. This is no doubt true.

Until I was writing this post, I thought about economic growth as it seems everyone does, without regard for the phases of the business cycle. Now I think that to look at growth, one needs to look at growth.

Figuring growth for a period that includes more than one phase of a business cycle is like looking at aggregate numbers. Information is lost. The growth rate of a business cycle is not equal to the growth rate of the growth phase of the cycle. And outside factors, such as policy (fighting inflation by slowing the economy) can reduce the growth rate, shorten the growth phase, and lengthen other phases of the cycle.

In the years since 2009 we have seen slow growth. Growth in the 1970s was slow, but not in the same way. In the '70s growth was slow on average. But in the growth phase, growth was rapid in the 1970s.

Today it is policy to increase growth. In the 1970s it was policy to reduce growth. And policy in the 1970s reduced average growth. But for the growth phase of the business cycle, growth rates in the 1970s were comparable to growth rates in the 1960s.

Memory is short, and recent experience counts for much in our thinking. It would be a mistake to look back to the 1970s and think of growth in that era as comparable to the past few years. Growth in the 1970s was good. There just wasn't very much of it.


RGDP 1960-1972 (FRED cPsD).xls
RGDP 1973-1981 (FRED cPsp).xls

How an economist thinks

I usually like reading David Glasner for snippets of economic history. But I was a little disappointed when I read his old post on 1970s Stagflation. Here is Glasner's opening:

Karl Smith, Scott Sumner, and Yichuan Wang have been discussing whether the experience of the 1970s qualifies as “stagflation.” The term stagflation seems to have been coined in the 1973-74 recession, which was characterized by a rising inflation rate and a rising unemployment rate, a paradoxical conjunction of events for which economic theory did not seem to have a ready explanation.

The term was not coined during the 1973-74 recession. Wikipedia:

On 17 November 1965, Iain Macleod, the spokesman on economic issues for the United Kingdom's Conservative Party, warned of the gravity of the UK economic situation in the House of Commons: "We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made."^[3][5] He used the term again on 7 July 1970, and the media began also to use it, for example in The Economist on 15 August 1970, and Newsweek on 19 March 1973.

Stagflation is not an incidental or inconsequential part of econ. I find it distressing that Glasner has so little concern about stagflation that he doesn't know the origin of the term, is willing to guess the origin, and is satisfied to make a bad guess. (If my view seems extreme, let it reflect the importance of stagflation in my economic thinking.)

Glasner does offer a good description of stagflation as "a paradoxical conjunction" of rising inflation in a stagnant economy. And he is right about the reason stagflation was significant: Economic theory could not explain it.


Glasner links to Karl Smith, who says

The 1970s were definitely an era of stagflation

and to Scott Sumner, who quotes that line and disputes it. As Glasner has it:

Scott observed that inasmuch as average real GDP growth over the decade was a quite respectable 3.2%, applying the term “stagflation” to the decade seems to be misplaced.

What is the argument here? Given that we did have rising inflation in a stagnant economy at times in the 1970s, the argument seems to be whether it is okay to call the decade an "era" of stagflation. Sumner says it is not okay, because growth on average was "normal" in the 1970s.

But Karl Smith does not say growth was slow in the 1970s:

Scott is correct that we remember the 70s as an era of slow growth but indeed GDP growth was rapid.

Smith agrees with Sumner that growth was good in the 1970s. Where is the problem?

They agree that growth was good. But Smith points out that there was stagflation. And Sumner says No, growth was good. Quite the non sequitur.

Hey... It is important to get the facts right. If growth was good in the 1970s, we need to know it. But Karl Smith does not dispute that growth was good in the 1970s. So what's the problem?

Maybe the problem is semantics: For Scott Sumner the word "era" implies "the whole decade". And then he mistakenly equates "stagflation" with "stagnation". Thus, Smith says there was stagflation in the 1970s, and Sumner apparently takes him to mean there was stagnation for the whole ten years of the 1970s. Sumner responds, saying real growth was normal and averaged a 3.2% annual rate in the 1970s.

The kindest interpretation of their dispute that I can offer is that Sumner knows that many people say growth was slow in the 1970s. And he knows that growth was not slow in the 1970s. And the discrepancy is a sore point for him. I sympathize.

Scott Sumner says it is incorrect to think that growth in the 1970s was slow. But so does Karl Smith. Come to think of it, Paul Krugman said it too. And David Glasner:

... if one looks at the periods of rapid increases in aggregate demand in which oil price shocks were absent, we observe very high rates of real GDP growth.

So Scott Sumner and Karl Smith and Paul Krugman and David Glasner and I agree that growth was good in the 1970s. And look at this graph from Marcus Nunes:

Graph #1 Source: Marcus Nunes. See also here and here.

Marcus shows inflation-adjusted GDP on a log scale, so that a constant growth rate appears as a straight line. In red, he shows a constant-rate trend line. And he marks up the graph to identify different periods. Look at the period labeled "G.I." for "Great Inflation" -- the inflationary years from 1965 to 1980.

Marcus's graph shows real GDP (blue) at or above trend for the entire inflationary period. By contrast, before 1965, and again after 1980, the blue line is at or below trend. The inflationary period shows particularly good economic performance.

So that's Scott Sumner and Karl Smith and Paul Krugman and David Glasner and Marcus Nunes and me. And the third economist named in Glasner's post, Yichuan Wang, says real growth should get a boost from inflation like we had in the 1970s (though he doesn't see it himself, according to Glasner).

So yes, there's good reason to be careful when talking about stagflation in the 1970s, inflation and stagnation in the 1970s. Good reason. And yet, Karl Smith *is* careful. He explicitly says growth was good in the 1970s. And he says it immediately after he calls the 1970s "an era of stagflation". Why, then, does Sumner choose to disagree with Smith when Smith is trying to agree with Sumner?

Why? Because Sumner has an agenda:

Rather than arguing over semantics, I’d rather focus on the important issue; what does the 1970s tell us about NGDP targeting?

You might have guessed. Sumner wants to talk about NGDP targeting. He doesn't want to argue over semantics. The whole "semantics" argument is a straw man that Sumner set up so he could say he doesn't want to argue over semantics. Sumner is out to get attention for his hobby horse, his NGDP targeting hobby horse. He says so himself.

And Sumner will stop at nothing to get that attention. He even re-defines "stagflation" to suit his purpose. Here's Glasner:

The term stagflation [means the combination of] a rising inflation rate and a rising unemployment rate ...

Yes. Stagflation is the increase in the two rates that, when added together, give the "Misery Index". But Sumner criticizes Karl Smith for using the same definition Glasner uses. Here's Sumner:

Karl seems to think [stagflation] means high inflation plus other bad things, like high unemployment.

Scott Sumner sticks a parenthetical finger in the definition of stagflation:

I had thought the word ‘stagflation’ meant high inflation plus slow output growth (due to slow growth in AS.)

By Okun's law, "slow output growth" is equivalent to "high unemployment". That change of wording is only a distraction. But Sumner modifies the concept when he adds the words "due to slow growth in AS". He puts those words in parentheses, as though they don't really change the definition. But those words change everything! By adding the causal factor to the definition of stagflation, Sumner changes everything.

Sumner's "AS" means "aggregate supply". Sumner's extra words make stagflation explicitly and exclusively a result of supply-side factors, by definition.

Sumner himself points out that he is changing the definition:

I think if the term ‘stagflation’ is going to mean anything useful, it has to refer to a periods where, for any given rise in AD, slower than normal AS growth leads to higher inflation. The 1970s do not meet that definition.

Sumner re-defines stagflation to suit his agenda, and suddenly the world is different. You have been bullshitted.


Glasner describes stagflation as

a paradoxical conjunction of events for which economic theory did not seem to have a ready explanation.

Glasner is right. The lack of explanation is the reason stagflation was such a big deal: Stagflation didn't fit with what economists knew about the world. The whole point of raising interest rates to reduce inflation is that it works by slowing the economy. Anti-inflation policy creates stagnation. It still does. But in the 1970s, inflation and stagnation were thought to be mutually exclusive. It was "inflation on the one side or stagnation on the other", as Iain Macleod said. Except, during the inflationary 1970s, we got inflation and stagnation at the same time. It meant there was something wrong with economic theory. It was a big deal.

It opened the door to Milton Friedman and Monetarism and Paul Volcker and all that came after. That's why stagflation is important. That's why it matters. To show that Milton Friedman and everything since Friedman is wrong, if that is what you might want to do, it is necessary to go back to stagflation and review what happened then, and think it all through. Instead of blindly accepting the notion that the whole decade of the 1970s was a time of stagnation. And instead of blindly accepting Scott Sumner's agenda-driven alternative.

Wrong Problem Redux

Let me pull out from yesterday's post several bits of excerpt from Scott Sumner. I'm taking everything Sumner after the topic-phrase "US growth before and after 1980".

There's one little piece I don't need today; I scratched it out.

Sumner, in yesterday's sequence:

Growth has been slower [since 1980], but that’s true almost everywhere. What is important is that the neoliberal reforms in America have helped arrest our relative decline...

...neoliberal reforms lead to faster growth in real income, relative to the unreformed alternative.

The neoliberal revolution occurred precisely because growth was slowing almost everywhere in the 1970s and 1980s, and after 1980 growth slowed the most in those countries that reformed the least.

And his summary:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

So what is Scott Sumner saying, really? Seems to me he says two things. He says there was a problem: Growth was slowing in the 1970s. And the second thing he says is that the neoliberal reforms "helped arrest our relative decline". I have problems with both of these statements.

First of all, the reforms did not solve nor even partially solve the problem. Making the economy grow faster is not the same thing as eliminating the cause of slow growth. The latter is a solution. The former is a tweak.

The problem was never solved. The neoliberal reforms used several work-around techniques to compensate for the problem of slow growth. Even if the reforms fully compensated for the decline, which Sumner admits they did not, the underlying problem would not have been solved by work-around reforms.

Secondly, what was the underlying problem? "Growth was slowing," Sumner says. I do not agree that slowing growth was the problem. Not in the 1970s. Look at this graph from Marcus Nunes:

Graph #1 Source: Marcus Nunes

Marcus shows inflation-adjusted GDP on a log scale, so that a constant growth rate appears as a straight line. In red, he shows a constant-rate trend line. And he marks up the graph to identify different periods. I wish to focus on the period labeled "G.I." for "Great Inflation" -- the inflationary years from 1965 to 1980.

Marcus's graph shows the blue line at or above trend for the entire inflationary period. By contrast, before 1965, and again after 1980, the blue line is at or below trend. The inflationary period seems to show particularly good economic performance. I find this odd, because Sumner (and everyone) says growth was not good in the 1970s. Sumner says "growth was slowing". Marcus's graph does not agree.

(Yes I know, there was inflation in those years, and it was a problem. But an inflation problem is not the same thing as a slow growth problem. And neither of those is the same as our actual problem, which was that better growth would come only with more inflation. We could no longer separate the two.)

Growth was well above trend in the inflationary years. But perhaps being above trend is not the same as good economic performance? I went to FRED, duplicated Marcus's graph, and added a trend line by eye, matching as best I could Marcus's red line from Graph #1:

Graph #2: Inflation-Adjusted GDP (blue) on a Log Scale with a Trend Line Added by Eye

The FRED graph shows recessions as gray bars, so now we can see that the recession of 1970 brought the blue line down to trend, as did the 1974 and 1980 recessions, and the 1982 recession brought it below trend. But apart from times of recession, in the 1965-1980 period the blue line tends not only to run above trend, but also to pull away from trend. To increase more rapidly than trend. To grow faster than trend. Repeatedly, each time until the Fed restrains growth to combat inflation.

Looks to me like growth was very good in those years. Too good, you might say. Maybe so, but that is not what Sumner says. "Growth was slowing", Sumner says.

You can't have it both ways.

The real problem was not that growth was slowing in the 1970s. We were getting good growth. The problem was, we couldn't get good growth without inflation. Growth could easily have remained vigorous, if we were foolish enough to accept the inflation.


The problem was not that growth was slow. We could have fixed that by the traditional methods. Nor was the problem inflation. We *did* fix that by the traditional methods. The problem was that the range of good options narrowed and then disappeared. The economy changed. There was no longer a golden zone where we could have decent growth and reasonable price stability at the same time. This was the problem.

To put it in terms an economist might understand, the Phillips curve shifted away from the origin.

The problem in those years was not that we couldn't get good growth. And the problem was not that we couldn't keep inflation at bay. The problem was that we could not do both at the same time.

That much remains true today.

Economic Performance: The Record

I found this old post (dated 7 March 2011) on my 'development' blog, where I put ideas together and check my spelling and stuff. Apparently I never posted this one. I'm ready now.

By the way: I do not accept for one second the old Time magazine claim that the "skillful" economics of the time had anything to do with the economy's performance. However, I do accept that the economy's performance was very good at the time.

In addition, let me emphasize the view implicit in Paper Money, that stagflation has nothing to do with raging inflation. Stagflation is the occurrence of inflation even during recession -- a "hybrid" outcome, Smith calls it.

For source information on some of the excerpts, hover over the text.


"You have to have lived in the 1950s and 1960s to have
experienced a good economy." -- Jude Wanniski, 1995
My economics, my explanation of the economic problem, paints a picture. It shows a history of the U.S. economy that goes back to when times were good.

In the Robert Lucas post, I quoted Wikipedia: Lucas "challenged the foundations of macroeconomic theory (previously dominated by the Keynesian economics...)." That's part of the picture.

The six decades since World War II flake out as three decades of Keynesian economics followed by three of Reaganomics or (as I call it now) Wanniski-nomics. The three of the Keynesian era include two good ones -- the '1950s and '60s -- and the not-so-good '70s.

The festering of the not-so-good gave us Robert Lucas and Jude Wanniski and Ronald Reagan and Reaganomics. Wanniski-nomics. Things got better for a while then. But of course there was the debt. And now, after thirty years of Wanniski-nomics, things are not so good anymore.

And of course, there is the debt.


Highlights from an article in Time magazine, 31 December 1965:

In Washington the men who formulate the nation's economic policies have used Keynesian principles not only to avoid the violent cycles of prewar days but to produce a phenomenal economic growth and to achieve remarkably stable prices. In 1965 they skillfully applied Keynes's ideas—together with a number of their own invention—to lift the nation through the fifth, and best, consecutive year of the most sizable, prolonged and widely distributed prosperity in history.

By growing 5% in real terms, the U.S. experienced a sharper expansion than any other major nation. Even the most optimistic forecasts for 1965 turned out to be too low. The gross national product leaped from $628 billion to $672 billion—$14 billion more than the President's economists had expected. Among the other new records: auto production rose 22% , steel production 6% , capital spending 16% , personal income 7% and corporate profits 21%. Figuring that the U.S. had somehow discovered the secret of steady, stable, noninflationary growth, the leaders of many countries on both sides of the Iron Curtain openly tried to emulate its success.

Says Budget Director Charles L. Schultze: "We can't prevent every little wiggle in the economic cycle, but we now can prevent a major slide."

A slide, of course, is not what the U.S. Government's economic managers have been worrying about in 1965; they have been pursuing a strongly expansionist policy. They carried out the second stage of a two-stage income-tax cut, thus giving consumers $11.5 billion more to spend and corporations $3 billion more to invest. In addition, they put through a long-overdue reduction in excise taxes, slicing $1.5 billion this year and another $1.5 billion in the year beginning Jan. 1.

If the nation has economic problems, they are the problems of high employment, high growth and high hopes. As the U.S. enters what shapes up as the sixth straight year of expansion, its economic strategists confess rather cheerily that they have just about reached the outer limits of economic knowledge. They have proved that they can prod, goad and inspire a rich and free nation to climb to nearly full employment and unprecedented prosperity. The job of maintaining expansion without inflation will require not only their present skills but new ones as well. Perhaps the U.S. needs another, more modern Keynes to grapple with the growing pains, a specialist in keeping economies at a healthy high. But even if he comes along, he will have to build on what he learned from John Maynard Keynes.

Time's praise was a kiss of death. As America's Adam Smith wrote in Paper Money:

That was the high point. The dragons of inflation and unemployment began to snort in their caves, and 'stagflation,' an awkward beast, a hybrid of inflation and stagnation, roamed without serious natural enemies. Cynics said there were two sure signs that the Keynesian era was waning. One was that Time magazine put Keynes on its cover....

In his 1987 book Alan Blinder, a member of the Council of Economic Advisers in the Clinton era, wrote:

Unfortunately, macroeconomics has been in utter disarray since the Keynesian consensus broke down in the 1970s.

Blinder's view was shared by Robert Heilbroner, who expanded on the thought:

Keynesianism was the economics of the world from around 1940 through the 1970s, but in the 1960s and 1970s came this extraordinary and quite unexpected inflation. And that took the bloom off the [Keynesian] rose. The Keynesian schema, which had tremendously wide acceptance, had no theory of inflation.... Since then, no new view that anyone can agree on has emerged, and there has been a vacuum in terms of a defining picture of what the hell economics is.... In the history of economic thought there has never been such a prolonged period of intellectual disagreement.

So this was my picture of the economy: Unprecedented success, until an indefatigable inflation arose; this inflation resulted in failure; and then disarray. Unprecedented growth in the 1950s and 60s -- the "golden age" -- followed by inflation and stagflation and slow growth in the 1970s, results that undermined Keynesian thought and policy. And then the patchwork called Reaganomics.

Right or wrong, this was my picture of economic performance since the second World War.


And then one day, there was Krugman:

Did The Postwar System Fail?

I’ve been posting about the contrast between the popular perception on the right that America had slow growth until Reagan came along, and the reality that we did fine pre-Reagan, in fact better; see here, here, and here. And what I’m getting as a common response — including from liberals — is something along the lines of, “That’s all very well, but by 1980 the postwar system was clearly failing, so what would you have done instead of Reaganomics?”

Which all goes to show just how thoroughly almost everyone has been indoctrinated by the current orthodoxy.

He included a little graph to show that "The Ford-Carter years look no worse — in fact, somewhat better — than the Bush years, especially if you look from business cycle peak to business cycle peak."

Krugman's post is from last May. Ten months ago. This has been bothering me for a while now, notions like "America had slow growth until Reagan came along" and "we did fine pre-Reagan." And the argument that the 70s were no worse than the Bush II years. And the rejection of the view that "by 1980 the postwar system was clearly failing." I started to doubt my picture of economic performance.

I might argue that the economy was up in the 1950s and '60s, down in the '70s, up in the '80s and '90s, and down again in the 2000's. That would fit Krugman's graph into my picture. But all was up in the air.

Was my picture distorted? Was Krugman's? Was it true, as Krugman says people say, that growth since the '80s has been good? Was it true, as Krugman says, that the Bush years as bad as the 1970s?

The most basic question was: What about growth? What happened with growth? Was there a golden age, a bad decade, and a great moderation thereafter? What does the history of our economic performance look like?

It came to a head, finally, after I came upon Stuart Staniford's Growth Was So Faster in the Post War Years. Staniford shows a log graph of long-term "Real Per Capita GDP" and says, "it's hard to read changes in small growth rates on a log graph."

He continues:

If we instead go to the BEA data, and compute the CAGR (compound annual growth rate) over the thirty year period 1950-1980, it was 3.63%, while the 30 year period 1979-2009, it was 2.66% (2010 is not available yet). So the last thirty years are a whole percentage point lower growth. And that's despite the earlier period including the very rough years of the 1970s.

I liked that, because it fits my picture: excellent growth in the 1950s and '60s, "rough years" in the '70s, then some improvement. But I want a better breakdown. How does the improvement since the '80s compare with the '50s and '60s? And how do the Bush years compare with the '70s?

Staniford then graphs "the ten year CAGR for the decade prior to each year," which shows the early decades significantly better than the later ones. But I have trouble matching up the years with the performance values on this graph.

The best fragment in Staniford's post was "CAGR (compound annual growth rate)." In a follow-up comment, he provided the calculation for CAGR. And, given the name of it, I could Google for more. Found some useful stuff.


I need to know. It can't be ambiguous.

I need my picture of history to be true, for I can explain it. I can explain the growth of the 1950s and '60s, the stagflation of the 1970s, the improvement of the 1980s and '90s, the decline and crisis.

I need this history to be true, or I need to know that it isn't.