Tuesday, July 31, 2012

Just how bad is the economy?

The second-quarter GDP numbers came out. The newspapers and Republicans pounced on low growth and anemic job growth. The Democrats rebut growth is growth and tell us of the steady job gains. How bad is the economy?

Economists know that levels matter, and that long-run growth matters more than anything else. I made a few graphs to emphasize these points.

Start with the level (in logs) of real GDP. (This is an update of a graph I saw on John Taylor's blog.)

Looking at levels you see the current awfulness better than by looking at growth rates. GDP declined almost 5% in the recession, but then started growing at a glacial pace, averaging 2.4% since the trough.  We seem stuck in this slow growth trap.

If you distrust trend lines, you are wise. But this one reflects a solid historical pattern. Here is real GDP and the 1965-2007 trend through postwar history.

You can see that the economy has quite reliably returned to the trend line after recessions.The 1950s had a steeper trend, but there too the small recessions were followed by catchup growth.

Here is what the recovery is supposed to look like (Again, idea stolen from John Taylor, except I'm using trends rather than "potential GDP'' which I distrust.) 

To be fair, I fit the trend through 1980, so I would not use ex-post information. You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth.

The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.

That's a lot -- and a lot more than the litany of quarterly growth rates suggest.

I used trends, rather than the CBO potential output. If you read how they make it, you're likely to do that too. But here is the same graph contrasting my trend and the CBO's potential

This is tragic. The CBO is giving up on us. The CBO potential, which goes towards a 2.35% long run growth rate, says that what we are seeing now is the new normal. All we can hope for is a modest recovery, and then anemic, sclerotic growth forever after that. The difference between 2.3% and 3.0% adds up fast as the years go by. (And the CBO has been bending the trend line down steadily as the recession goes on. Back in 2005, it's "potential" looked like my "trend." They didn't see a permanent downward shift in level or reduction in growth rates. Look for "potential" to keep declining.)

Well, perhaps the CBO is doing its job as forecasters, saying "here is what will happen if you continue down the present policy path," not "here is where the economy would be if you adopted growth-oriented policies."

What about employment? I find employment more significant than unemployment. Unemployment means job search. It means people answer a survey saying they don't have a job, and are actively searching for a job. It does not count all the people who gave up, or went on disability (effectively ending their careers), early retirement, or are just living in Mom's basement and playing video games. (I don't mean to make light of it. That may be the most tragic, as the chance to accumulate skills is lost.)

Here's a good summary measure, the ratio of employed people to the population

This is really tragic. Employment declined by about 7 million people, from 63% of the population to about 58%. And it has stayed there ever since. The "job gains" you hear about in the news are just barely keeping up with population. As we are about 14% below trend and slowly losing ground, we are 7 million jobs short and sitting there too.

The link between employment and output is productivity. To keep the numbers simple here, I made plots of output per worker. Output per hour, and corrections for demographics and capital use are better, but this is simpler and works about as well. Here is a graph of productivity.

I crammed a lot of information in this graph. The first thing to notice is the behavior in the recession and now. There was a dip in productivity -- output fell more than the number of workers fell. But it has since recovered.

In the short run, capital doesn't change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.

There's more in the graph. In the long run, rising productivity is behind everything good in the economy. It's what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It's the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn't all pleasant. Lots of incumbents lose out. Rising productivity is the core of a "growth" agenda as economists understand the word. 

You see in the graph that something terrible happened in the 1970s. Productivity, which was behind the large postwar boom, slowed down to a glacial 1% per year. 1982 marked a break in that as well. Productivity  started growing 1.69% per year, producing the boom of the late 1980s and 1990s, and incidentally producing large Federal surpluses.

OK, but the far right of the graph doesn't look so good does it. Here it is, blown up, with a 2003-today trend marked in as well.

This is an economists' horror movie. Yes, productivity did rebound. But it seems to be growing slowly as well.

The trends are an economists' horror movie. Real GDP seems not to be recovering at all -- no period of swift growth to go back to a trend. We seem stuck at 2.4% growth forever. The CBO is giving up on us too. Employment will not recover as a fraction of population until the economy recovers. We seem stuck at low employment forever. And now we seem headed to a 1970s productivity slowdown as well.

I don't view this as contentious, outside of Presidential politics. Paul Krugman thinks the economy is pretty awful too.

What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We're stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out. 

Disclaimer. Yes, I know there are better ways to measure all this, especially productivity. This is an attempt to paint the basic picture using the simplest numbers. The message is, look at the levels and look at the trends. If you do that with better data, you will have gotten the message.

Data are from the St. Louis Fed's wonderful Fred database, series GDPC96, GDPPOT,  EMRATIO.


  1. Agreed that the economy is awful. Agreed that improved productivity would help.

    The charts may be misleading in that the GDP in 2004 to 2008 may have been inflated by (1) the real estate bubble (2) unsustainable spending paid for by home equity loans and (3) the financial industry booking profits that were not real. It may be that we are back on a trend line that ran from about 1991 to about 1998.

    If we want productivity to pick up - training, research and useful infrastructure are three things government can do. Government can also eliminate distorting subsidies for agriculture, bio fuels and fossil fuels.

    One possible problem is that American companies are hoarding cash offshore, hoping for a tax holiday. This will impose a drain on the economy. If American companies could be encouraged to repatriate AND distribute that cash it might juice the economy - say a flat 20% repatriation tax for all money which is repatriated and immediately distributed as dividends with no tax on the dividends in the hands of the recipient.

  2. Brother John.
    Excellent. Please also take a look at Rockefeller scenarios of the future. Technology. This is a serious subject.

  3. http://www.rockefellerfoundation.org/uploads/files/bba493f7-cc97-4da3-add6-3deb007cc719.pdf

    Technology future development.
    We might have to expand out minds. I don't believe Malthus was referring to this scenario. I am sure none of the people from the past could forsee our situation.
    I first learned to be a welder and there was a good future in this. Robots now occupy the entire welding sector. We now have entire meat processing plants turning to Obama to force all meat products in America to be produced by union labor. The meat companies have joined in a law suit against the unions. Now the entire chicken can be processed by robots. People have now been completely removed from meat processing. The unions are the only reason they still employ people. Textiles. Knitting and weaving is no longer done in flat sheets with simple patterns. Robots have removed people entirely from the textile industry.
    Metal Cutting and Fabrication. ROBOTS
    Logistic information. Radio Freequency ID. ROBOTS
    Textiles. ROBOTS
    Meat processing ROBOTS
    Vegitable hydroponics aeroponics. processing. ROBOTS
    People are disposable. Please Take some time to surf YouTube and see these things. This is the world Keynes mentioned in his Letter To Our Posterity. But a world where everyone has leasure time to ponder the mysteries of the universe. We now have to prove ourselves worthy to live.
    Those kids you mention wasting opportunity playing video games are going to find themselves joining gangs to fight for survival if we don't start thinking more about them RIGHT NOW.
    The far distant utopia Keynes talked about is now upon us. But this could turn into the most terrifying nightmare mankind has ever dreamt.
    Think happy thoughts.

    1. But who biulds and maintains the robots? Who repairs them? Who designs them? The "robots took yer jobs!" fallacy is a loony as the broken window fallacy

  4. Very helpful overview.

    Far be it from me to promote mono-causality, but let's have a look at a graph of real energy prices here: http://www.wtrg.com/oil_graphs/oilprice1947.gif
    The thick black line is the relevant one.

    I haven't done the time-series econometrics, but this seems a likely suspect the police could hold for more than 24 hours.

    Policy implications can be left for other occasions, but they don't seem beyond our present knowledge.

  5. Those declining productivity trends are part of what Tyler Cowens calls the "Great Stagnation." A telling graph: http://macromarketmusings.blogspot.com/2011/02/great-stagnation-and-total-factor.html

    1. Tyler also points to amazing basic science going on now with the potential for a return to really good productivity growth. I agree -- making the current slow-growth trajectory even more tragic.

  6. I'm not a highly qualified professional or Academic, so my two cents probably aren't worth anything but that (or maybe less). Nevertheless, here it is:

    Shocks aren't transitory. They have unit roots. Expecting a return to the norm at this point and given the global severity/volatility/uncertainty is silly. This isn't a policy problem; Do you really believe that if governments start listening to you or someone else the world will be aright? I think not.

    The incentives are already there, it will just take time. This isn't something economists can fix.

    Devote your attention to something else, imho.

    1. Outside the economy, what would you have an economist study? I don't think it's ever a good thing to bury your head in the sand and assume that everything is great or terrible. Policymakers are going to make policy with or without economist recommendations and I'd rather they not be driving blind. It's one thing to ignore research and analysis, but it's another thing entirely for that research and analysis to not exist in the first place.

  7. John,

    But what about a Price-Level target, or even better, a NGDP target? You never discuss these as possibilities.

    What if the Fed were to declare an NGDP target toward the pre-cash trendline with a simulatenous open ended commitment for QE?

    1. Last post did advocate a price level target. And I did briefly touch on the last one. I don't think the Fed controls NGDP. If it did, it certainly would not have stood for what just happened. I think the Fed's basically at its limit. More QE means banks just hold fewer low-interest Treasury bills and more low-interest reserevs

    2. "I don't think the Fed controls NGDP. If it did, it certainly would not have stood for what just happened."

      I'm not sure that's true. The Fed, under its current regime, does not try to control NGDP -- it tries to control inflation. If the Fed were really concerned about sub-par NGDP growth, it should have trying to do more. If it had tried and failed to generate more NGDP growth, that would be more conclusive, but every time inflation approaches 2% the board seems to conclude that it has done enough for the moment, regardless of trend NGDP.

  8. Good post (I could follow it:)

    Word counts
    "private debt" -- zero.
    "debt" -- two in the sidebar, none in the post or comments.
    "credit" -- zero.
    "money" -- one, in the comments.

    If financial costs are a drag on growth and productivity, one would not know it from this post.

  9. More words missing. Education. Regulation. Cronyism. Marginal tax rate. Give me a break, how many words and graphs do you want in a blog post?

  10. Great post. For my part, I wonder how much of what's happening here is related to the emergence of "emerging markets." Is international competition driving North American wages and employment down?

    You can get some pretty darn good computer programmers in India and Pakistan without even having to set up shop there. They can be outsourced by contract and can deliver their work electronically, without ever even meeting their North American bosses. Manufacturing has been moving off-shore for a long time. Poorer countries have long had the comparative advantage in agriculture.

    I don't see any of this as bad, I just wonder whether we Americans are resisting the inevitable too much. Other countries can do what we used to do much better than we can. We should drop the subsidies, trade barriers, and tax penalties on international trade and allow ourselves the freedom and opportunity to develop new areas of expertise.

    I just think the more we fight this, the worse it's going to be. Both parties are equally culpable here, of course. Mr. Obama, tear down these (trade) walls.

  11. " I don't think the Fed controls NGDP. If it did, it certainly would not have stood for what just happened. I think the Fed's basically at its limit. More QE means banks just hold fewer low-interest Treasury bills and more low-interest reserves"

    Wow.. just wow. I mean have you even heard of Milton Friedman? You do realize He advocated massive money printing by the Japanese monetary authorities to get Japan out of the similar situation. we have no. And QE doesn't mean the Fed has to buy Treasury bills. It can buy anything, Treasur bonds. MBS securities. Even BERNANKE has been saying the same thing for the last three years. the Fed is not out of ammo, it just chooses not to use it. Of course the Fed controls NGDP. They don't control RGDP of course. But how can they not control the nominal economy? NGDp is roughly the same as MV or PY the only measure of the money supply that matters, the money which has velocity.
    The reason why they haven't acted is because they're stuck in a ridiculous price growth rate framework, they're astoundingly slow and resistant to change and new idea, and the inflation hawks (sadists) are preventing recovery by sacrificing millions of unemployed to the price stability god Not realizing of course, that its not price stability that matters, it nominal spending LEVEL stability.

  12. Great post. As a 30 year old planning for the future, growth is the single most important variable to my future financial security. I wish more people my age understood the importance and demanded pro-growth policies.

    All the bickering over parochial interests won't mean diddly in 40 years if we've average 2.4% instead of 3% growth. with GDP at $15 trillion at 2.4% for 40 years gives us $39 trillion in GDP, at 3% it's $50 trillion. That 0.5% deficit in growth will lead to an economy 25% smaller than it could have been. With an economy 25% smaller than it should be, we will not have enough resources to make good on our government entitlements, but instead of facing this reality our political class buries it's head in the sand.

    1. I am quite certain that learning to speak Chinese is the most important thing for your future.

    2. You have two choices.
      1 Learn Chinese
      2 Pray for a MASSIVE $ Devaluation

      You are forgetting the elephant in the room. Compound interest.
      You must first pay the Baby Boomers interest with your labor. At the time you retire you will no longer have labor to trade for their interest. You will have nothing and you won't be interesting to anyone.

  13. Is this a big shocker that it is harder to grow at the same rate when you are already really big than when you are still small ? once you pick all the low hanging fruit, why do you expect growth to be nicely linear based on past trends? It's more likely that we will grow very little until we have a big technological jump in something, whether

  14. The first two graphs specify "Real GDP" while the third just says "GDP", so is that nominal GDP? How much of the Reagan recovery was "real" vs "nominal"?

    Just what constitutes pro-growth policies may be in contention. People advocating a more "dovish" Fed would say that accomodative monetary policy is pro-growth (provided you don't get into inflationary spirals). Bryan Caplan would say education is way overrated and most measurements confuse private with social benefit. Lots of Dems like to point to strong growth during the high-tax postwar years and contrast Clinton era growth after he raised taxes with GWB's after he cut them. I actually do think there is a plausible argument that Bell Labs spent lots of money on research because it would rather acquire prestige that way than lose lots of money paying taxes.

    1. All my graphs were real GDP. Anyway, the 1982 recovery coincided with an abrupt end to inflation, so that goes the other way.

    2. An "abrupt end" to inflation as in 0% inflation? I had heard that it ran at about 4%. I don't mean just in 1982, you're talking about a number of years which include a couple with 6% real GDP growth. Looking at monthly data from the St. Louis Fed, it seems the lowest rate of inflation from 1982-1986 was about 2.5 in the middle of 1983. The NBER shows the most recent recession ending in 2009, with a monthly inflation trough of -2% shortly afterward and a peak of nearly 4% about three-quarters through 2011 (between 1982-1986 there was a peak of nearly 5% in early 1984). All in all the Reagan recovery does look to have averaged about 4% inflation, twice the "unofficial target" of the current Fed which they have tended to undershoot in the recent recovery.

  15. Job Participation is at a normal level. Look back to the 1950’s. Absent credit expansion and bubbles and reduced manufacturing, employment is where is should be.

    1. That's demographics. Far fewer women were in the workforce in the 1950s.

  16. There is an inherent flaw with the GDP formula. Other market distortions as mentioned above aside, inclusion of government spending as part of GDP creates a basic inaccuracy.

    The theory, of course, is that the inclusion of government spending is necessary to equal out the tax money government receives, which could not be spent by the private sector. But what about the deficit spending? This artificially jacks up the GDP numbers, creating a rosier picture than the reality. In other words, if we say we have a $ 15 Trillion GDP, but government spend a trillion more than it took in, we actually have a $ 14 Trillion economy, which more closely represents the actual performance of the private sector. Thus, a Keynesian stimulus would appear as an artificial increase in GDP, but have little if any positive effect beyond that.

    However, I believe that including government spending in GDP at all is a fallacy. Government does not create wealth, it consumes it. Government does not produce goods and services that are paid for directly, in the sense of a super market, but rather it consumes them. Rather, therefore, a more accurate depiction of the economy would not include government spending at all.

  17. Kent, by your logic Soviet Union had a GDP of exactly zero during the 74 years of its existence. Soviet economy was severely suboptimal compared to ours, but I am fairly certain that its GDP was not zero :))))

  18. Real GDP appears to be following a random walk...

  19. John, excellent working showing conclusively:

    1) Bush tax cuts were followed by us falling below trend

    2) Bush deregulation was followed by us falling below trend.

    3) Bush cuts in R & D spending were followed by us falling below trend.

    Policy prescriptions:

    Raise taxes

    Regulation more

    Increase spending on R & D

    It also would probably be a good idea not to fight and loose another stupid war (Iraq, now Iran)

    Seems fairly simple

    Thanks for the insights

  20. John

    I will make a deal with you. If you will answer the following two questions fully and honestly, I will stop posting comments. I will not even reply to your answer.

    I will be frank why I ask the question and that is that you have many followers who falsely assert that government spending doesn't lead to economic growth, that stimulus spending doesn't either, etc.

    Here are my questions, based on two scenarios.

    1. Student S wants to go to U. of Chicago, but has no money. She goes to the local bank and borrows the money. The bank funds the loan by creating new "money," which it can do because it is a fractional reserve bank.

    2. Gov't wants Student S to go the U. of Chicago, so it goes to the local bank and borrows the money. The bank funds the loan by creating new "money," which it can do because it is a fractional reserve bank. Student S goes to college for free.

    Question 1:

    Is it good for the present and future economy for us to permit the student to borrow, privately, to go to the U. of Chicago?

    Question 2:

    When the gov't borrowers the money, Hows does the economy know the distinction? How does the economy know that the gov't borrowed the money and not S?

    1. I for one want you to stay. We need some sinners to preach to. Please don't go. You are the reason Brother John made this site.

    2. Kids playing in mine shafts. Keynes. You are absolutely correct. CONSPIRACY Keynes himself said it was conspiracy. "yet a little while longer man must put up with Conspiracy" you know very well that Brother John will never discuss Conspiracy on a public platform. His job would be gone immediately. But we can bark at the daemons in the night. Hahaha. Please don't go away. We Austrians would have nobody to attack. And we do like a good fight. Please don't go.

    3. You are very confused. A definition may help you understand.
      Government: the institution with the legal monopoly to use force.
      In question 1, no force is involved. No one is obliged to act against his will
      In question 2, government extracts money from citizens with the use/threat of force and gives it to a particular individual it chooses. Then calls this whole thing with a pretty name like "equality and fairness act"

  21. Professor Cochrane,

    This seems like hysteresis to me. If there is evidence of the cycle affecting the trend, what about the methodological trend-filtering process that is so usual in the business-cycle literature? What is the alternative? Time-varying trends using the HP filter would be totally misleading for an scenario like this.

    1. I did some statistical work on trend vs cycle in GDP back in my youth, see "permanent and transitory components" and "random walk in GNP" here
      The conclusion of that work is that GNP does not follow a random walk. There is such a thing as a business cycle, and drops in GDP (especially relative to consumption) are likely to revert. Neither does it return fully to trend, however, as I showed above. Consumption is a good indicator of the eventual trend in GDP. I'll work up a post on that.

      But I didn't want to use that detrending method here. Suppose we really are on a policy-induced eurosclerotic track, and the CBO knows it, lowering "potential" and consumers know it, lowering consumption. Those are then a good forecasts, but does not show where the economy could, and should, be going with better policies.

    2. what is the underlying theory that predicts that productivity, which is a driver of long-run economic growth, should be increasing at a nice constant rate forever ? aren't there natural limits, for example, to how much stuff people will buy and won't that affect economic growth, regardless of better policies ?

  22. "What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles."

    It is that simple! Recessions and output gaps are monetary phenomenon that should be cured with a monetary response!

    Friedman knew this, why don't you?

  23. Thanks! I learned a lot from this.

    Could borrowing at negative real interest rates fix the deficit problem? I understand that productivity growth is the most essential thing, but every bit helps right?

    1. That depends on who is borrowing. When you or I refinance our paychecks we are charged 25% home 7 to 10% student loan 7-9% but when the banks borrorrow "from themselves "ow they are paid 1-2 % +100%after amortization.
      Amortization periods
      You 30 to 40 years
      Bank .000,000,1 seconds.

  24. John,

    What's your take on the argument from, among others, Jim Bullard and Steve Williamson that, via HP-filtering, we're in a situation now in which real GDP = trend? See, for example:


    I have many time series friends who "don't let their friends use the HP-filter" (in the spirit of Cogley & Nason [1995], etc.). That said, HP-filtering is carried out by tons of very serious scholars.

    Phil Rothman

    1. Let's separate the statistical from the economic

      HP filtering is simply a two sided univariate bandpass filter. It's like turning the treble knob all the way to the left. It's useful to compare models that aren't trying to make long run predictions to data. I like it better than linear detrending or first differencing for that use. This whole post was really about how looking just at growth rates is misleading.

      However, it ignores the inherently multivariate nature of business cycles. For defining the "trend" of GDP, it ignores all the information in all the other series, and the fact that in the long run, GDP, consumption, investment, etc. all move together.

      Hence, I prefer multivariate detrending procedures. Regarding all series as having a single random walk component is a good way to do it, though there are some long-term trends as in the split of durable vs. nondurable consumption to deal with.

      I'm working up some plots of consumption and GDP which make much the same point. Consumption is a pretty good "trend" in GDP, by permanent income theory. Consumers don't buy if they know the recession will last forever. And this has worked well in practice.

      But we're still a) looking at statistical high vs. low frequency trends and b) looking (at best) at forecasts of what is likely to happen rather than economic analysis of what could happen -- or should happen.

      My post basically agrees with Bullard and Williamson that we seem to be heading to a new normal -- GDP will never recover, and will now grow at 2.2% forever, with disastrous consequences.

      But nothing in a trend or forecast says this has to be the way things work out. If that new trend is the result of sclerosis-inducing policy, rather than (say) being the result of America running out of new ideas, then it is exactly right for HP filters, Beveridge-Nelson trends, the CBO, private forecasts, and consumption to all indicate this is the way we're heading. It is not right to conclude that's where we have to go!

      Bullard and Williamson take as an implication that whatever is causing the lower trend, monetary policy can't help. I agree with that -- but I think there are other policies that can help. But that too is an implication one takes by adding economics, nothing that HP filters by them selves magically tell you.

  25. Professor,

    Could you kindly verify that comparing GDP and productivity levels at pre-internet (1965) and internet (now) times still adequate, given that so much of economy has gone "on-line"? Going forward we need less and less 'hard stuff' (which impacts so much the value of GDP figure) while the quality of our life (efficiency-wise, in terms of cost of access to goods, services, info, etc.)improves, may be it is time to look at something else rather than just GDP?

    Thank you

  26. John, I enjoy your blog, and thought you might be interested in my version of the charts you are using here to compare Real GDP to trend from 1965 on. To me, the labeling on the y-axis of your charts is confusing, though technically correct. In my chart I use a logarithmic scale (as you do), but the labels represent trillions of real GDP. Not surprisingly, the slope of my trend line is just about exactly the same as yours.

    The chart I'm referring to is the first one in this post:


    1. Scott:
      You're definitely ahead of me in the chart-art department. Everyone else, take a look at Scott's post for good art work

  27. Grose domestic product is a measure of volume, weight and tally. As in 1 chicken. 2lb chicken. And so forth. 1cubic yard of cement, gravel, pot ash. Marajuana, we can't take numbers from the government. This same thing happened in china during the cultural revolution. The government always lies to IT'S subjects. When doing research we need actual numbers from businesses. And that doesn't mean asking the comex how many ounces of silver they have. They themselves have stated that they have nothing, but that doesn't stop them from issuing their reports with fictitious numbers. I don't see any economists sitting on the highways counting different types of trucks and their weights. Real stuff is what real research is about. No more of this government stats. It's completely fictitious.

  28. I have to say I feel frustrated by the perception that it is desirable to return to the "trend" of growth seen in the past decades. To my mind, the last 40 years have been characterised by increasingly loose monetary policy and credit-fuelled growth. Naturally this sort of policy leads to a level of economic activity which is unsustainable. A desire to return to the same levels of growth will surely take us down the same trecherous path. In my opinion there are huge misallocations that have built up from years of cheap money which are not being allowed to wind up. As long as they don't we wont see real growth again.

    I think of a drug addict for whom the effects of his vice have worn off, but continues to use because he can't bear not to, even though the discomfort caused by quitting the drug will be better for him long-term.

  29. I agree with your point that the economy is doing very bad. But I think your use of "output per worker" as a measure of productivity is very misleading. What is more complicated about using the more accurate measure of "output per hour"? It's here:


    It shows a steady trend all the way until the early nineties, then about ten years of accelerated growth (when the advances in IT finally let to improved productivity), then a return to the slower pace before. This is completely different from your picture, which mixes actual productivity with the average hours worked per worker. It seems like productivity growth has really already returned to normal, and the effect you're seeing in your graph is people working shorter hours due to the depressed economy. This is still a demand side story, not a supply side story.

  30. When would you NOT want growth-oriented policies?

  31. This comment has been removed by the author.

  32. John, outstanding post, thank you. I am puzzled that you do not seem to believe there are any effective monetary policies to support with your objective of boosting the economy back-on-trend. In particular you appeared to rule out NGDP-Level-Targeting:

    (…)I don't think the Fed controls NGDP. If it did, it certainly would not have stood for what just happened. I think the Fed's basically at its limit.

    In your note: A Big Stick for the Fed you outlined an argument for CPI futures targeting:

    The Fed needs something new. Here’s what I think works best. In every theory, governments easily cut off inflation or deflation by switching to a commodity standard.


    Instead, the Fed can target the thing it cares about – expected CPI inflation – rather than the price of gold. To do it, the Fed can target the spread between TIPS (Treasury Inflation Protected Securities) and regular Treasurys, or target CPI futures prices. Here’s a simple example. Investors buy a CPI-linked security from the Fed for $10. If inflation comes out to the Fed’s target, they get their money back with interest, $10.10 at 1% interest. If inflation is 2 percent below target, the Fed pays $2 extra -- $12.10. This pumps new money into the economy, with no offsetting decline in government debt, just like the helicopter drop. If inflation is 2 percent above target, investors only get back $8.10 – the Fed sucks $2 out of the economy at the end of the year. If investors think inflation will be below the Fed’s target, they buy a lot of these securities, and the Fed will print up a lot of money, and vice versa.

    (…) This note draws on a more detailed paper, "Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic."

    Could you please comment:

    1. do you still support your proposal to target a CPI-linked security?

    2. would you support a Fed target based upon a NGDP-linked security?

    I am encouraged that the latter policy (2) was recently proposed by Christina Romerin Dear Ben: It’s Time for Your Volcker Moment.<


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.