Recessions in nominal vs in real GDP

Matthew Yglesias "A different way of looking at it is to think of the recessions in nominal terms. Here’s Nominal GDP from 1980 to 1985:

The double-dip was associated with some flattening of Nominal GDP growth, but the deviation isn’t gigantic. What’s more, the super-rapid “catch-up” growth in real output that led us out of the recession didn’t involve anything unusually looking in nominal terms relative to the pre-recession trend. What happened was that the composition of nominal growth switched to one that involved less inflation and more “real” growth.

Compare that to more recent events:

That’s an entirely different kettle of fish. In nominal terms, we experienced a dramatically bigger recession than happened in the early eighties. Normally people think of “real” GDP as more important (that’s why they call it real) but for many purposes nominal numbers are very meaningful. My mortgage payments are denominated in nominal terms, as are my cable & phone bills, my salary, and various other contracts I’m involved with. When a huge gap opens up between the actual and trend levels of nominal economic activity, that means the best-laid plans of firms and households are all thrown out of whack. This is probably a situation the Federal Reserve could ameliorate if they were willing to produce enough inflation to push the price level back into line with trend, but if they continue to insist on a policy of opportunistic disinflation the adjustments will take longer.

Who does the Fed work for?

Matthew Yglesias:
As you read about Kansas City Fed President Thomas Hoenig’s plan to increase the unemployment rate by pushing inflation even further down below target, it’s worth asking yourself “How does a person get to be President of the Kansas City Fed?” Well, you get picked by the Board of Directors. And who picks the Board? Local bankers, mostly:

Each Federal Reserve Bank has a nine-member board of directors: The member banks elect the three Class A and three Class B directors, and the Board of Governors appoints the three directors in Class C. Directors are chosen without discrimination as to race, creed, color, or national origin. The directors in each class serve staggered three-year terms.

Class A directors of each Reserve Bank represent the stockholding member banks of the Federal Reserve District. Class B and Class C directors represent the public and are chosen with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers; Class B and Class C directors may not be officers, directors, or employees of any bank. In addition, Class C directors may not be stockholders of any bank. The Board of Governors annually designates one Class C director at each District Bank as chair of the board of directors and another Class C director as deputy chair.

This system has never made any real sense. The Fed’s Open Market Committee is an important maker of public policy. There’s no reason private firms should have such a large role in its governance. But many aspects of Fed governance have escaped scrutiny in recent decades thanks to the perception that the Volcker, Greenspan, and Bernanke era Feds were doing a good job. Increasingly, however, it’s clear that the Fed is not doing a good job—it seems incapable of hitting its inflation target, for example— which should spark increased discussion of the matter.

The People Who Sell Their Forecasts to Paying Clients Believe the Stimulus Is Working - Grasping Reality with Both Hands

I don't know of any firms selling forecasts who think that fiscal stimulus programs don't work. Nor do I know of any real business cycle forecasters. Are there any?

The People Who Sell Their Forecasts to Paying Clients Believe the Stimulus Is Working - Grasping Reality with Both Hands: "Only those who make their nut one way or the other by pleasing Republicans claim that it isn't. Jackie Calmes and Michael Cooper are on the case:

Jackie Calmes and Michael Cooper: Now that unemployment has topped 10 percent, some liberal-leaning economists see confirmation of their warnings that the $787 billion stimulus package President Obama signed into law last February was way too small. The economy needs a second big infusion, they say. No, some conservative-leaning economists counter, we were right: The package has been wasteful, ineffectual and even harmful to the extent that it adds to the nation’s debt and crowds out private-sector borrowing.

These long-running arguments have flared now that the White House and Congressional leaders are talking about a new “jobs bill.” But with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working. The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would...

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Matthew Yglesias » The American Recovery and Reinvestment Act Cut Taxes Substantially

Matthew Yglesias » The American Recovery and Reinvestment Act Cut Taxes Substantially: "the main problem facing right-of-center and left-of-center proponents of fiscal stabilization alike, namely that the political mechanism of enacting discretionary stimulus through congress is extremely clumsy and leads to bad policy outcomes. The most helpful thing to do before the next downturn would be to establish in advance a reasonably streamlined way of preventing state and local government from hiking taxes and cutting services in the middle of a recession.

Super-Economy: Japan's problem is supply, not demand (updated)

Super-Economy: Japan's problem is supply, not demand (updated)
...Let's first look at the lost decade, 1991-2000. When the rest of the world was having rapid, IT-fueled growth, Japan was stagnating. Here are the growth rates in real GDP between 1991-2000:

For all the nice years Japan had 9.6% growth compared to 38.7% for the U.S and 22.7% for the EU.15. The U.S grew by an average of 3.7% per year, Japan only 1.0% per year.

But as most of you know Japan is undergoing a rapid demographic transition. The country was and is aging. Because the old and children cannot work, when we want to compare countries with very different demographic characteristics instead of calculating GDP per capita, it makes sense to calculate GDP per working age adult (people aged 15-65).

Whereas the number of potential workers in the U.S increased by 13% during Japans "lost decade" (1991-2000), and by 3% in for example France, the Japanese potential workforce actually shrank during these years. Adjusting for this, the growth in Japan was 9.8%, compared to 16.9% in Germany, 17.3% in France, 16.3% in Italy and 23.2% in the United States. The U.S grew by twice, not four times of Japan (remember that these were the best years of the U.S and the worst years of Japan).

The importance of the demographic transformation in Japan is even more clear if we include the entire 1990-2007 period.

In non-population adjusted figures, Japan's real GDP grew by 26% in total these years, the lowest in the OECD. In comparison the figures are 63% for the U.S and 44% for the EU.15.

But during this period the U.S saw it's potential labor force (the number of people between 15-65) increase by 23% and the EU.15 by 11%, while Japan had a decrease of 4%.

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical!

Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.


Also notice Italy (who does better than we think) and Ireland (who does worse, much of the growth was due to their young population).

Nor did productivity grow any slower in Japan than Europe.

The Triumph of the Stupidly Optimistic

The Triumph of the Stupidly Optimistic
How many jobs are there where being wrongly optimistic for ages gets you promoted? I offer you ... equity analysts, who have, on average, overestimated S&P 500 earnings by 2x for a generation.

A Cross Of Gold - Paul Krugman Blog - NYTimes.com

A Cross Of Gold - Paul Krugman Blog - NYTimes.com
I’d add another point: the 19th-century economy had much more flexible prices and wages than later came to be the case — not, primarily, because of different institutions, but because it was still largely an economy of small, self-employed farmers. More than half of US workers were in agriculture up until the 1880s. Peter Temin has told me — I can’t find it in a quick search — that the United States didn’t start having modern recessions, with large declines in real GDP, until the Panic of 1873; Britain started having them much earlier, because it became an industrial economy earlier.