Keynesian fallacy

Where We Are, Economically

UPDATED (10/26/12)

The advance estimate of GDP for the third quarter of 2012 has been released. Real growth continues to slog along at about 2 percent. I have updated the graph, but the text needs no revision.

*  *   *

It occurred to me that the trend line in the second graph of “The Economy Slogs Along” is misleading. It is linear, when it should be curvilinear. Here is a better version:


Derived from the October 26, 2012 release of GDP estimates by the Bureau of Economic Analysis. (Contrary to the position of the National Bureau of Economic Research, there was no recession in 2000-2001. For my definition of a recession, see “Economic Growth Since World War II.”)

The more descriptive regression line underscores the moral of “Obama’s Economic Record in Perspective,” which is this:

The claims by Obama and his retinue about O’s supposed “rescue” of the economy from the abyss of depression are ludicrous. (See, for example, “A Keynesian Fantasy Land,” “The Keynesian Fallacy and Regime Uncertainty,” “Why the “Stimulus” Failed to Stimulate,” “Regime Uncertainty and the Great Recession,” The Real Multiplier,” “The Real Multiplier (II),”The Economy Slogs Along,” and “The Obama Effect: Disguised Unemployment.”) Nevertheless our flannel-mouthed president his sycophants insist that he has done great things for the country, though the only great thing that he could do is to leave it alone.

Obama is not to blame for the Great Recession, but the sluggish recovery is due to his anti-business rhetoric and policies (including Obamacare, among others). All that Obama can rightly take “credit” for is an acceleration of the downward trend of economic growth.

Related posts:
Are We Mortgaging Our Children’s Future?
In the Long Run We Are All Poorer
Mr. Greenspan Doth Protest Too Much
The Price of Government
Fascism and the Future of America
The Indivisibility of Economic and Social Liberty
Rationing and Health Care
The Fed and Business Cycles
The Commandeered Economy
The Perils of Nannyism: The Case of Obamacare
The Price of Government Redux
As Goes Greece
The State of the Union: 2010
The Shape of Things to Come
Ricardian Equivalence Reconsidered
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
More about the Perils of Obamacare
Health Care “Reform”: The Short of It
The Mega-Depression
I Want My Country Back
The “Forthcoming Financial Collapse”
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
The Stagnation Thesis
America’s Financial Crisis Is Now
Understanding Hayek
Money, Credit, and Economic Fluctuations
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
Don’t Just Stand There, “Do Something”
The Commandeered Economy
Stocks for the Long Run?
We Owe It to Ourselves
Stocks for the Long Run? (Part II)
Bonds for the Long Run?
The Real Multiplier (II)
The Burden of Government
Economic Growth Since World War II
More Evidence for the Rahn Curve
The Economy Slogs Along
The Obama Effect: Disguised Unemployment
Obama’s Economic Record in Perspective

Economic Growth Since World War II

As we await (probably in vain) the resumption of robust economic growth, let us see what we can learn from the record since World War II (from 1947, to be precise). The  Bureau of Economic Analysis (BEA) provides  in spreadsheet form (here) quarterly and annual estimates of current- and constant-dollar (year 2005) GDP from 1947 to the present. BEA’s numbers yield several insights about the course of economic growth in the U.S.

I begin with this graph:

The exponential trend line indicates a constant-dollar (real) growth rate for the entire period of 0.81 percent quarterly, or 3.3 percent annually. The actual beginning-to-end annual growth rate is 3.2 percent.

The red bands parallel to the trend line delineate the 99.7% (3-sigma) confidence interval around the trend. GDP has been running at the lower edge of the confidence interval since the first quarter of 2009, that is, since the ascendancy of Barack Obama.

The vertical gray bars represent recessions, which do not correspond precisely to the periods defined as such by the National Bureau of Economic Research (NBER). I define a recession as:

  • two or more consecutive quarters in which real GDP (annualized) is below real GDP (annualized) for an earlier quarter, during which
  • the annual (year-over-year) change in real GDP is negative, in at least one quarter.

For example:

Annualized real GDP in the second quarter of 1953 was $2,366.2 billion (i.e., about $2.4 trillion in year 2005 dollars). Annualized GDP for the next  five quarters: $2,358.1, $2,314.6, $2,303.5, $2,306.4, and $2,332.4 billion, respectively. The U.S. was still in recession (by my definition) even as GDP began to rise from $2,303.5 billion because GDP remained below $2,366.2 billion. The recession (i.e., drop in output) did not end until the fourth quarter of 1954, when annualized GDP reached $2,379.1 billion, thus surpassing the value for the second quarter of 1953. Moreover, the year-over-year change in GDP was negative in the first three quarters of the recession.

Unlike the NBER, I do not locate a recession in 2001. Real GDP, measured quarterly, dropped in the first and third quarters of 2001, but each decline lasted only a quarter. But, whereas the NBER places the Great Recession from December 2007 to June 2009, I date it from the first quarter of 2008 through the third quarter of 2011 (at least).

My method of identifying a recession is more objective and consistent than the NBER’s method, which one economist describes as “The NBER will know it when it sees it.” Moreover, unlike the NBER, I would not presume to pinpoint the first and last months of a recession, given the volatility of GDP estimates:

This graph suggests three things: (1) the uncertainty of quarterly estimates, (2) a declining rate of growth since 1947, and (3) some degree of periodicity in economic growth.

The periodicity, though irregular, can be seen more clearly in the following graph, where the vertical gray bars indicate quarters in which growth is below the declining trend line shown in the preceding graph.

The two preceding graphs lead to two observations:

The following statistics underscore the first point:

Inter-recessionary period Annual  growth rate
1947q4 – 1948q4 4.6%
1950q1 – 1953q2 7.5%
1954q4 – 1957q3 3.9%
1958q4 – 1960q1 3.7%
1961q2 – 1969q3 5.1%
1970q3 – 1973q4 4.4%
1975q4 – 1980q1 4.2%
1981q1 – 1981q3 3.3%
1983q2 – 1990q3 4.2%
1991q4 – 2007q4 3.1%

To put a point on it, here are the rates of growth during the three longest periods of above-trend growth since World War II:

  • 1963q1 – 1966q1 — 6.6%
  • 1983q1 – 1986q1 — 5.1%
  • 1995q3 – 1999q4 — 4.5%

It is hard to deny the almost-constant deceleration of growth in the post-war era — especially the sharper deceleration after 1970 — a deceleration that is embedded in the longer downward trend that began in the early 1900s.

In this connection, I note that the “Clinton boom“ — 3.4 percent real growth from 1993 to 2001 — was nothing to write home about, being mainly the product of Clinton’s self-promotion and the average citizen’s ahistorical (if not anti-historical) perspective. The boomlet of the 1990s, whatever its causes, was less impressive than several earlier post-war expansions. In fact, the overall rate of growth from the first quarter of 1947 to the first quarter of 1993 — recessions and all — was 3.4 percent.

What about the lingering Great Recession? It lingers mainly because it has been used — first by Bush, then by Obama — as an excuse for eve more disastrous expansions of the cost and reach of government.

Related posts:
Are We Mortgaging Our Children’s Future?
In the Long Run We Are All Poorer
Mr. Greenspan Doth Protest Too Much
The Price of Government
Fascism and the Future of America
The Indivisibility of Economic and Social Liberty
Rationing and Health Care
The Fed and Business Cycles
The Commandeered Economy
The Perils of Nannyism: The Case of Obamacare
The Price of Government Redux
As Goes Greece
The State of the Union: 2010
The Shape of Things to Come
Ricardian Equivalence Reconsidered
The Real Burden of Government
Toward a Risk-Free Economy
The Rahn Curve at Work
The Illusion of Prosperity and Stability
More about the Perils of Obamacare
Health Care “Reform”: The Short of It
The Mega-Depression
I Want My Country Back
The “Forthcoming Financial Collapse”
Estimating the Rahn Curve: Or, How Government Inhibits Economic Growth
The Deficit Commission’s Deficit of Understanding
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid
The Stagnation Thesis
America’s Financial Crisis Is Now
Understanding Hayek
Money, Credit, and Economic Fluctuations
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Why the “Stimulus” Failed to Stimulate
The “Jobs Speech” That Obama Should Have Given
Say’s Law, Government, and Unemployment
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
Vulgar Keynesianism and Capitalism
Why Are Interest Rates So Low?
Don’t Just Stand There, “Do Something”
The Commandeered Economy
Stocks for the Long Run?
We Owe It to Ourselves
Stocks for the Long Run? (Part II)
Bonds for the Long Run?
The Real Multiplier (II)
The Burden of Government

The Great Recession Is Barely Over … Maybe

UPDATED 12/22/11

The third estimate of real GDP for the third quarter of 2011 (3Q2011) is $15 billion lower than last month’s advance estimate. The annualized rate of $13,331.6 billion (in chained 2005 dollars) is only $5.6 billion above the estimate for the fourth quarter of 2007 (4Q2007), the last pre-recession quarter.

Based on the third estimate, real GDP grew at an annual rate of 0.011 percent — 11/1000 of one percent — between 4Q2007 and 3Q2011. In other words, real GDP in 3Q2011 is the same as it was in 4Q2007. Whether or not the Great Recession has ended is still up in the air and will not be known (possibly) until the release of GDP estimates for 4Q2011.

Related posts:
The Great Recession is Not Over
The Keynesian Fallacy and Regime Uncertainty
Regime Uncertainty and the Great Recession