The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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June 20, 2007

Apples To Apples

Today at Angry Bear, my friend pgl is doing some back-of-the-envelope econometrics:

From 1980QIV to 1992QIV, average annual real GDP growth = 3.0%.

From 1992QIV to 2000QIV, average annual real GDP growth = 3.6%.

From 2000QIV to 2006QIV, average annual real GDP growth = 2.6%.

Notice something? During the low tax eras (Reagan-Bush41 and Bush43), we witnessed lower growth rates. During the Clinton Administration – which began with its fiscally responsible policies with a tax rate increase – we saw strong growth. Maybe part of the explanation has to do with the impact on national savings from fiscal irresponsibility justified by phony free lunch promises.

I have a bit of a problem with the evidence here.  To get the gist of my objection, take the following quiz: 

Which one of these time periods did not include a recession?

a. 1980QIV to 1992QIV

b. 1992QIV to 2000QIV

c. 2000QIV to 2006QIV

If you answered b, you win the gold star.  And if you knew that, are you really surprised that the period from 1992 through 2000 had higher average growth than the other two periods, which did include recessions?  Suppose we instead make the comparisons including only the expansion years of the Reagan-Bush41 and Bush43 administrations?  Here's what you get:

From 1983 to 1989, average annual real GDP growth = 4.3%.

From 1992 to 2000, average annual real GDP growth = 3.7%.

From 2002 to 2006, average annual real GDP growth = 2.9%.

You could just as well look at those numbers and conclude that potential GDP growth -- measured cycle to cycle -- is declining through time.  And if you accept pgl's characterization of irresponsible policy, followed by responsible policy, followed by irresponsble policy, you might then conclude that policy has very little to do with that trend.

Perhaps you would want to argue that I shouldn't exclude recessions because the absence of a downturn in the 1992-2000 period is itself evidence of the superior growth effects of the fiscally responsible policies of the Clinton administration?  Let me try to talk you out of that with a few more questions: 

1. Do you really want to blame the Reagan fiscal policies for the 1980-82 recessions -- which are almost universally attributed to the Volcker Fed's fight against double digit inflation inherited from the policies of the 1970s?

2. Do you really want to characterize Bush41 as a tax cutter?  And would you maintain that position knowing that Clinton's major piece of fiscal policy -- the Omnibus Reconciliation Act of 1993 --was pretty much of copy of the Omnibus Reconciliation Act of 1990, the legislation in which President Bush the Elder famously broke his "no new taxes" pledge?

3.  Do you really want to finger the Bush43 tax cuts for the 2001 recession which began a scant two months into the administration and was over even before the tax cuts took effect?

Look -- It might very well be that "fiscal responsibility," as pgl defines it, is a central ingredient of pro-growth policy.  But those GDP comparisons don't make the point.

UPDATE: pgl responds --to no particular objection from me -- here and here.

June 20, 2007 in Taxes , This, That, and the Other | Permalink


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Macroblog asks, "Do you really want to blame the Reagan fiscal policies for the 1980-82 recessions -- which are almost universally attributed to the Volcker Fed's fight against double digit inflation inherited from the policies of the 1970s?"

The first of the two dips, no.

But let's stop and think a moment. Why did Volcker push rates up to such punishing levels? Did it have anything to do with deficits?

If you answered yes to the latter, then Reagan has to take the blame for the second, terribly damaging dip of the recession.

One can argue that Reagan's increase of military spending far beyond what he had promised in the campaign was necessary. I would not. One can argue that his tax cuts were essential as a growth stimulus. I would not. One can even argue that the out-of-control budgetary extravaganza that David Stockman describes was a necessary price to be paid for getting the changes Reagan wanted. I would not.

But one cannot argue that whatever the h--l Reagan was doing didn't to get paid for (it wasn't and hasn't been), which is an important reason for the Fed's severity.

Posted by: Charles | June 20, 2007 at 11:17 PM

Well I am not going to be the 'one' to argue with Charles. I would not and I do not.
Why should I rescue Volcker in preference to Reagan? or pgl in preference to our fine host David?
If you answered politely to the latter, that it is always civil to side with the host no matter how uncompassionately he posts (and fresh from declarations of sensitivity, people!), give yourself a ...gold star? Really?
I cannot be bought by these gold star thingies, you? No, ok give yourself a good slap to the forehead and know that your first swing at it was just a warm-up...to your mighty swath which would be about measuring GDP and not GDP growth rates, about the respective income distributions in those periods (ok, "expansions" look good but pgl battles the political thugs who are as arbitrary as he is.) and the increasing debt.

Posted by: calmo | June 21, 2007 at 02:16 AM

Unfortunately, I don't have time to dig up the actual numbers, but a few years ago I computed annualized real GDP growth as a function of Democratic or Republican Presidents, going back to about 1920-1930 (I don't remember the exact year). I also tried lagging it by 1 or 2 years (assuming there is a delay from when the president takes office to when his policies can have an effect).

The result was quite dramatic. In all cases (0, 1, 2 year lag), the annualized real GDP growth was significantly higher during Democratic presidents.

I'm not sure exactly what it proves, but it was a much larger sample than the one referenced in this blog entry.

Posted by: ErikR | June 21, 2007 at 08:27 AM

You have a valid point that the recessions can distort the comparisons. But the recovery period immediately after a recession also distort comparisons. So if you are going to remove the recession years from the comparisons you should also remove the snap-back years of the recovery that are just as much a distortion.

For the 1980s this implies your should remove 1984 and 1985 when growth was 4.5% and 4.1%. Without these two observations your average growth for the Regan years is much lower. However, you do not get this distortion for the Clinton years since the early recovery period only had 3.3% real gdp growth in 1992.

You are correctly pointing out one data distortion only to replace it with an even more distorted comparison.

Posted by: spencer | June 21, 2007 at 08:53 AM

David - you have a point here, but I would have praised it quite differently. I follow up over Angrybear with re-phrasing what I was trying to say as well as what I think your point is here.

Posted by: pgl | June 21, 2007 at 09:08 AM

To attribute it all to the President at the time? Well, that is seeing a lot more power in the executive branch than I see.

Posted by: wally | June 21, 2007 at 09:26 AM

Wally - it's not the name of the President at issue. It IS the fiscal policy chosen by the government "at the time".

Posted by: pgl | June 21, 2007 at 09:48 AM

Calmo, I'm not quite sure what you are saying.

Let me try to explain why I chose to focus on the very narrow issue I did. Many Net debates try to deal with too much and end up resolving nothing. But on the issue of the twin recessions of the early 1980s, we actually have fairly good inside evidence as to why things unfolced as they did. We have David Stockman's account from inside the Administration. We know that there was tension between conservatives (GOP president, GOP Senate, nominally Democratic but boll weevil-controlled House) and the Fed. We know that monetarism was driving monetary policy, and that fiscal policy was very loose (see www.time.com/time/magazine/article/0,9171,954012-3,00.html, for example). So, there's not really much question that interest rates were held high because of deficits, nor is there any question that Republicans had the upper hand in government, nor is there any question that high interest rates diminish growth.

If David will re-consider this one point, we could move onto the next and the next and maybe come to a conclusion.

Posted by: Charles | June 21, 2007 at 11:29 AM

Thank you for casting that 'one' into the drink Charles. Seriously, one can be a pain in the butt, you know?
And thank you for not enumerating your points for us flow-an-go guys who have trouble even with "points" and "moving forward" sometimes even to conclusions....you know?
Ok, now you know.
This is not a debate...I am unable to act as a fair and balanced moderator and am not about to concede that role to anyone else, you?
I accept 'discussion' when sober and polite, nearly civil...like now.
I appreciate your detail and your bravery at accepting Stockman's account as the veritable truth, but I also appreciate spencer's skill in unraveling this "comparison" of economies over broad horizons and see serious problems of referential opacity...much to the chagrin of economists who need to feel that certain eras were managed better than others...and that their profession, still in its infancy, counts for something.

Posted by: calmo | June 21, 2007 at 12:13 PM

If you measure from the recession bottom there has been no significant difference in real gdp under Clinton and Bush II. Moreover, both experienced weaker growth then Reagan did in the 1980s and he experienced weaker growth then Kennedy/Johnson did in the 1960s.

However, when you look at the composition of growth there are significant differences between Clinton and Bush. Under Clinton investment made a much larger contribution while under Bush it has been consumption and housing that led growth.

To be honest, I do not much care about the debate over why growth is that much different under democratic and republican presidents. However, I do care that the theory that supply-side economics leads to greater investment and higher standards of living is simply incorrect as it has been practiced under Republican administrations over the last quarter century.

Posted by: spencer | June 21, 2007 at 04:26 PM

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