{"id":577,"date":"2017-11-24T23:30:57","date_gmt":"2017-11-25T04:30:57","guid":{"rendered":"http:\/\/commoncents.blogwyrm.com\/?p=577"},"modified":"2017-11-03T17:06:11","modified_gmt":"2017-11-03T21:06:11","slug":"meet-the-new-normal-same-as-the-old-normal","status":"publish","type":"post","link":"https:\/\/commoncents.blogwyrm.com\/?p=577","title":{"rendered":"Meet the New Normal, Same as the Old Normal"},"content":{"rendered":"

With all due apologies to The Who<\/em>, the title of this post is inspired by the same cynical sentiment woven throughout and aptly summarized in the closing line of their classic song Won\u2019t Get Fooled Again<\/em>.\u00a0 My cynicism is directed at the academic and professional economists who seem to ignore the breadth of US economic history (and human nature) and argue that, somehow, we are now in a unique situation not seen anywhere in the tumultuous upheavals of the past.\u00a0 That the store of US ingenuity and invention has run its course and we, and perhaps the entire world, are stuck at new normal of low economic growth.\u00a0 To these useful idiots I rejoin one of the wisest lines from the same tune \u2018And the world looks just the same and history ain\u2019t changed\u2019.<\/p>\n

To set the stage for my jaded view on these vapid practitioners of the dismal science, let\u2019s take a look at a bit of economic data.\u00a0 A simple visit to the Bureau of Economic Analysis<\/a> is all it takes to get gross domestic product (GDP) figures in Excel from the years 1929 to 2016.\u00a0 Yep, one URL, one click, and one download is all it takes.<\/p>\n

\"\"<\/a><\/p>\n

I\u2019ll confine myself to the first three columns containing year, GDP in billions of current dollars, and GDP in billions of chained 2009 dollars.\u00a0 The year column is self-explanatory but the other two are worth reviewing.\u00a0 The second column (GDP in current dollars) is the BEA\u2019s best estimate, to the nearest 0.1 of a billion dollars, of the monetary value of all the goods and services produced within the US in a given year, expressed in that year\u2019s dollars.\u00a0 The third column (GDP in chained 2009 dollars) contains the BEA\u2019s best estimate as to the value inflation-adjusted to 2009.\u00a0 I can\u2019t speak to why 2009 is chosen as the anchor.<\/p>\n

When graphed, the GDP values, which show a general upward trend, also reveal the scars inflicted on the economy over these past 88 years.<\/p>\n

\"\"<\/a><\/p>\n

The Great Depression\u2019s presence is clear in the minimum in the GDP in 1933.\u00a0 The wartime bump in 1941-1945, the post-war let down, the stagflation of the mid-seventies, the recession in 1991 are all noticeable.\u00a0 But few features are as pronounced as the onset of the Great Recession and the subsequent lower rate of growth.<\/p>\n

GDP growth is defined by taking the difference in GDP\u2019s between two subsequent years and dividing by the earlier of the two.\u00a0\u00a0 A plot of the resulting percentages,<\/p>\n

\"\"<\/a><\/p>\n

while open to a wide range of interpretations, looks like a system that is settling to a tighter operating range after a rather turbulent start.\u00a0 The horizontal line represents the average value of 3.34 over the 87-year period.<\/p>\n

A zoom into \u2018recent\u2019 history<\/p>\n

\"\"<\/a><\/p>\n

shows a pronounced drop in annual growth in the post-Great Recession recovery.\u00a0 Quantitatively, the average GDP growth over the time span from 1970-2007 (inclusive) was 3.09 percent.\u00a0 This time frame includes the stagflation of the mid-seventies (runaway inflation and high unemployment), the 1987 Stock Market crash, the 1991 recession, and the 2001 tech bubble collapse as well as the Reagan recovery, and the \u2018new digital economy\u2019 of the mid-nineties.\u00a0 The average GDP growth over the time span from 2010-2016 has been 2.13 percent, nearly a full percentage point lower than the short-trend average and 1.2% lower than the full long-term trend.\u00a0 If the time span from 1929-2007 is considered, the average GDP growth is 3.58 percent (even including the Great Depression), making the recent sub-par growth even worse.<\/p>\n

All sorts of theories have been concocted by the intelligencia to justify this \u2018new normal\u2019.\u00a0 For example, John Fernald, in his October 11, 2016 article entitled What Is the New Normal for U.S. Growth?<\/a><\/em>, states:<\/p>\n

\nEstimates suggest the new normal for U.S. GDP growth has dropped to between 1\u00bd and 1\u00be%, noticeably slower than the typical postwar pace. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality.\n<\/div>\n

He further argues that \u2018the new normal pace for GDP growth\u2026might plausibly fall in the range of 1\u00bd to 1\u00be %...based on trends in demographics, education, and productivity.\u2019<\/p>\n

David Houle offers a slightly different interpretation.\u00a0 In his article Low inflation and GDP growth is the new normal<\/a><\/em>, dated August 15 2016, Houle lays the blame at the feet of:<\/p>\n

\n\u2026globalization and technologically induced trends and realities, making historical economic comparisons less relevant.\n<\/div>\n

In the regular column Buttonwood\u2019s notebook<\/a><\/em>, published in The Economist<\/em> June 2, 2016, the author had this to say<\/p>\n

\nThis year's approach describes the global outlook as \"stable but not secure\". In essence, Pimco thinks that the \"new normal\" will continue, with the US managing 1.5-2% growth (at or above trend, in its view), Europe managing 1-1.5% and China at 5-6%.\n<\/div>\n

Leigh Buchanan\u2019s piece entitled Report: 3 Percent U.S. GDP Growth Rate Is Unrealistic<\/a><\/em>, published in Inc. on May 19, 2017, in which she relies heavily on the opinion of Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget.\u00a0 Buchanan closes her piece in dramatic fashion by saying<\/p>\n

\n\"The bottom line,\" said Goldwein, \"is we should not be buying magic beans. Three percent growth is not completely impossible. But it would be a heroic feat to get there.\"\n<\/div>\n

And finally, rounding out our sample, is Mark Thoma\u2019s What if slow economic growth is the new normal?<\/a><\/em> (CBS News\u2019 MoneyWatch on September 19, 2016), wherein he cites Robert Gordon\u2019s explanation for this historical suppression of growth in the US, saying it is that<\/p>\n

\nthe country has entered an era where productivity growth will be much lower than in the past. According to Gordon, the digital revolution now underway is much less important than inventions that came about between 1870 and 1970 such as electricity, sanitation, chemicals, pharmaceuticals, transportation systems (the internal combustion engine in particular) and communication.\n<\/div>\n

Of course, there were many, many more jumping on the \u2018new normal\u2019 bandwagon.<\/p>\n

Rare (and unheeded) was the voice speaking that 3 percent growth was again realistically possible.<\/p>\n

But here we are, with revised estimates for 2017 Q2<\/a> and Q3<\/a>, showing two successive quarters with GDP growth over 3%, and that trend seems to be continuing into the fourth quarter.\u00a0 I won\u2019t try to guess what policies have changed but clearly something has.\u00a0 And, for this analysis, it isn\u2019t actually important to figure out what the change is.\u00a0 It is simply worth pointing out that all of these prognosticators and economic pundits were wrong \u2013 dead wrong.<\/p>\n

Human economy is a complex thing with an immense number of moving parts.\u00a0 It is the height of arrogance to somehow label \u2018now\u2019 as extraordinary compared to \u2018then\u2019.\u00a0\u00a0 By what measure do you say that the transition from pre- to post-WWII US involvement was less \u2018globalizing\u2019 than the current trends now?\u00a0 By what technological yard-stick do you argue that the advances from 1862 (the final publication of Maxwell\u2019s equations) to 1929 (Solvay conference) are more important than the progress from 1990 (dawn of the internet) to 2017 (bio-engineering, quantum entanglement)?\u00a0 Has human nature changed recently so that the period from 2009 to 2016 must be analyzed differently than the periods before (conveniently all lumped in as the \u2018old normal\u2019)?<\/p>\n

You may be wondering why, then, did these pundits jump on the \u2018new normal\u2019 bandwagon in the first place.\u00a0 There are looks of possible reasons.\u00a0 No doubt some of them wanted to be seen as wise and erudite, others succumbed to the all-too-human tendency to view the current age as somehow harder that all others (\u2018in my day\u2026\u2019), some had an agenda for talking the economy down and some wanted to avoid controversy by criticizing the policies of the time.\u00a0 And, as interesting as it may be to diagnose why they said what they said, the real question is why did any of us listen to them.\u00a0\u00a0Maybe next time we won\u2019t be fooled again.<\/p>\n","protected":false},"excerpt":{"rendered":"

With all due apologies to The Who, the title of this post is inspired by the same cynical sentiment woven throughout and aptly summarized in the closing line of their... Read more ><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-577","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=\/wp\/v2\/posts\/577","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=577"}],"version-history":[{"count":4,"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=\/wp\/v2\/posts\/577\/revisions"}],"predecessor-version":[{"id":583,"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=\/wp\/v2\/posts\/577\/revisions\/583"}],"wp:attachment":[{"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=577"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=577"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commoncents.blogwyrm.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=577"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}