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-- Brad Delong

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Sunday, June 26, 2011

A Different Look at GDP Growth Since the 50's

Art posted a bar graph of average GDP growth by decade.  I was struck by the nearly identical performance of the 70's, 80's, and 90's.  Remember the 70's?  Oil price shocks, stagflation, the misery index.  The 80's - St. Ronnie, Morning in America, voodoo supply side economics.  The 90's - Poppy's recession, Clinton's temporary hiatus in fiscal insanity, budget surpluses. 

Decade increments are tidy and convenient, but miss the story told by presidential administrations.  While time marches on, policy matters, and different regimes have different policies - or at least they did until the current administration.

I happen to have average GDP percentage growth rates by president at my fingertips.

It looks like this.

Like Art, I've put a best fit power line on the graph, that tells essentially the same story.  But now that we've separated Poppy from Billy-Bob, and Jimmy from the first Cheney administration, we get some interesting detail.  Reagan is only marginally better than Carter, who makes all other Rethug Presidents look like fools.  Clinton stands over Reagan, and achieved this while balancing the budget - pure Keynesianism!  B. Hoover Obama follows the Shrub playbook on economics and foreign policy, to his and our detriment.

Here is the same data, plotted along with standard deviation.

This time the power trend line is based on the Std Devs.  Yep - there' yer Great Moderation.  I explain it like this:

Big changes in short time spans cause Std Dev to increase.  The biggest variations come from recessions and quick, strong recoveries.   There were three recessions in the 50’s so Std Dev never had a chance to decline.  The 60’s and the 90’s were both recession-free, so Std Dev could decline in the one case, and stay low in the other.  The recessions of the 70’s were deep, but the recoveries were strong, so volatility climbed.  The back-to-back recessions of ’80 and ’82, with sharp recoveries in ’81 and ’83 kept Std Dev high.  The Great Recession took Std Dev to the highest level since the 80’s.  All of the volatility jumps (see detail at the Great Moderation link, above) can be explained in terms of recessions.  Avoid recessions, and Std. Dev. will be low.

How, then, do we explain the two Bush administrations, with their recessions in 1990 and 2001, but no jump in volatility?  In each case, the fall into recession was not sudden – it followed a period of declining GDP growth.  Similarly, in each case, the climb back out of recession was slow, faltering, and failed to generate even a single quarter where GDP growth topped 7%.  From WWII until 1983, top recovery quarters typically exceeded 10%.

What this indicates is that the Great Moderation really is a data artifact – though not quite in the way I expected.  Reduced GDP growth numbers play a part, but the real key is understanding how recessions contribute to observed Std Dev.  Recession-free times have low Std Dev values, and tepid recoveries from recessions that occur in a low growth context will also have low values.  While the Great Moderation is real, the standard explanation is inadequate, and comes from failing to look at the data with a critical eye.

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