Tuesday, May 3, 2016

John Cochrane on economic growth

There are three kinds of lies, "lies, damned lies, and statistics," supposedly said Benjamin Disraeli. This applies to John Cochrane piece in the Wall Street Journal today. Cochrane says that:
"Sclerotic growth is America’s overriding economic problem. From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually. Since 2000, it has grown at half that rate—1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%. Last week’s 0.5% GDP report is merely the latest Groundhog Day repetition of dashed hopes."
That is all true, and I myself complained about slow growth last week. However, this gives a false impression that the slowdown is a very recent thing, of the 2000s. In all fairness there has been a slowdown in growth going back to the 1970s or at least the 1980s. Growth since 1973 has been around 2.8%, and 2.6% since 1980, the years of the first oil shock and the productivity slowdown, and the beginning of the Reagan revolution respectively.

Yes, it is true that growth has further slowed down since the last recession (1.8% since 2000, and 1.2% since 2008), but growth has not only been slower over the last three decades (which, by the way go hand in hand with worsening income distribution), but also it has been more dependent on financial bubbles. And the last three recessions have been associated to the burst of a bubble. And given the structural conditions of the US economy, it seems that only with a bubble we will have healthier growth again.

The point is that an economy that depends on excessive accumulation of private debt, and debt-driven consumption bubbles is more volatile and prone to crisis. And that is associated both to financial deregulation and worsening income distribution. Certainly not to what Cochrane sees as the main American problem: "that the U.S. economy is simply overrun by an out-of-control and increasingly politicized regulatory state. If it takes years to get the permits to start projects and mountains of paper to hire people, if every step risks a new criminal investigation, people don’t invest, hire or innovate."

The notion that further deregulation would lead to a spurt of growth is preposterous. Yeah, because deregulating the financial sector has worked so well.  By the way, investment is a result of growth (accelerator) as well as innovation (Kaldor-Verdoorn). The problem is not enough spending on a sustainable basis, because party politics impedes public investment, and income inequality makes private spending more unstable. Austerity and inequality, not excessive regulation are behind low growth. But at least he is right that growth did not slowdown because of lack of innovativeness or a savings glut.

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