I want to draw your attention to a slide presentation (pdf) from Nobel Prize-winning University of Chicago economist Robert Lucas (hat tip: Greg Mankiw).
I think the parallels he draws between the banking system of the 1930s and the shadow banking system of the Aughts and policy decisions in the two economic downturns are interesting. So are the contrasts he notes in Fed and federal government policy.
However, in a theme I’ve repeated a number of times here, I think he’s looking at the wrong trend for growth. To assert that the just under 3% real growth he notes for most of U. S. history extends past the 1990s and through 2007 ignores that the late 90s and Aughts were both characterized by bubbles. Consequently, I think that you’ve got to believe some combination of the following:
- The bubbles were irrelevant to real GDP growth which seems incredible to me.
- The long term trend can continue without bubbles.
- Future bubbles will continue the long term trend.
- The change in trend (sans bubbles) he points out began a long time before 2007.
I believe the last one of those. I can envision several competing or complementary explanations for that but I honestly don’t see another reasonable conclusion.
A bubble always leaves growth in its medium. More internet, more houses, or more tulips. Things never got as bad as tulips for us. Internets and houses are worth something, and will contribute something to long term growth.
So the answer is 5) an unknowable fraction of each bubble was productive growth
He has almost 140 years of data, the last 20 would have minimal impact on the trend line. Even if you removed the last 20 years his graph would look pretty much the same.
I think the answer to this would be that bubbles have been irrelevant to long term GDP growth, which seem much more believable.
I don’t think anyone is saying that 3% is carved in stone. That was the long term growth rate, but the reason for that growth rate might depend on factors that can change as the underlying culture/civilization changes. In other words, it is a parameter and while it is assumed to be fixed for the short to medium term, it could be variable in the longer term.
For example, Lucas points out that despite widespread diversity between a number of countries in the 1870’s things were looking good in terms of “catching up” but that the catch up stalled in the 1970’s. He notes that the views on why things stalled differ, and that his is that changes to the regulator and tax structures discouraged both savings and work effort which, if true, would adversely impact growth rates over time.
What caught my eye was Lucas focusing on the fractional reserve system and noting how it is “fragile” a “house of cards”.
The slide on page 25 is great, IMO.
This brings together a couple of points I’ve seen in different places. Prof. James Hamilton pointed out the policies under the first bullet. These are all designed to curtail output.
Cartels restrict output to raise prices and profits. Unions restrict supply of labor to raise wages. Higher tariffs discourage imports and grant greater market power to domestic producers which result in higher prices and greater profits (for domestic producers).
Aside from the higher wages for union workers (and note those wages come at a cost of a reduced number of workers, so this isn’t really all the wonderful either) these changes are harmful to consumers.
Robert Higgs has argued that the demonization of business was a factor in delaying a recovery. It increased uncertainty amongst businessmen so they invested less, expanded less, hired less. There were concerns that such expenditures would end up amounting to nothing if businesses were seized by the government or nationalized.
I’ll add that Higgs thinks we have a similar problem today, but not with demonization. Now it is as Lucas says, “Government doing too much.” That this creates an uncertain future so businesses are reluctant to do those things that would result in growth. They are playing it “conservative” which is why so many firms are sitting on vast amounts of cash.
It is ironic that the crisis in 2007/2008 allowed Obama to implement his agenda is now leading to lower/anemic growth (at least according to Lucas and Higgs). If we are on the brink of another recession it may also cost Obama his second term.