Friday, May 20, 2011

Great Stagnation, continued

PBS NewsHour just did a segment on Tyler Cowen's Kindle Single, The Great Stagnation, which I reviewed here. I highly recommend watching it as Cowen is a beast.

A great mystery in economics is what happened in 1973 to derail us off the growth rate of potential output that the U.S. had seen since WWII. Potential output is determined by real factors of production -- human and physical capital, natural resources, and technical knowledge. While the trend has still been upward, it has not been at the same high rate. Cowen argues that the U.S. had basically picked all the "low-hanging" fruit (as described in my book review linked above) by the 1970s.

David Beckworth creates the nice graph of Total Factor Productivity illustrating what Cowen is talking about:
Note that we've had plenty of recessions since 1947, but those didn't have great effect on U.S. productivity growth. Populations grow and people keep learning and inventing things during recessions, etc.

Hypotheses abound about the Great Stagnation, but no one is certain. As previous post commenters have linked to, "supply-siders" argued that the stagnation problem could be solved purely by deregulation and lowering tax rates. Retrospectively, Peter Ferrara, Art Laffer and other Reagan mythologists argue that they actually solved this stagnation problem in the 1980s. Look closely at the graph for the effects the Reagan Revolution had on U.S. productivity. How about the similar Bush tax cuts on income and saving? See it? ("What do the data say?")

The truth (and my point) is that Congress, the President, the Fed, and political parties don't have much, if any, effect on U.S. economic productivity. They can help us better utilize capacity that we have, but not the magnitude of the actual capacity.

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