REVEALED: The ERRORS on “The truth about Ronald Reagan´s economic growth miracle”

This Joe Weisenthal post is very MISLEADING! In critiquing James Pethokoukis he could have done much better. What we get is a “war of bias” through badly conceived statistics. If only the first chart had been presented in the correct way – in log scale – the second and third charts of Weisenthal´s post would have been dispensable.

The “Reagan years” were never about a “growth miracle”. A quarter of a century before Eddy Elfenbein “did a brilliant post pointing out that since 1951, the economy has basically grown at a steady 3.1%/year annual clip, year and year out”, it had been more or less established by Nelson & Plosser that US growth was “trend stationary” i.e. the growth trend was “constant” at about the 3.1% clip Eddy mentions.

You can visualize this in my version of Pethokoukis chart (which covers the period from 1950 and shows Real GDP per Capita in PPP (i.e. comparable) dollars) presented in log scale. The US travels along like the proverbial “choo choo train”. You can also see that after the war, ravaged countries like Japan and Germany grew much faster (just see the “steepness of the RGDP-pc slope) during the 1950s and 1960s. That´s what economists call “catch-up” (where programs like the “Marshall Plan” were extremely helpful).

What the “Reagan years” and the years following were about, acquiring the sobriquet “Great Moderation”, was the steep drop in growth volatility. This is illustrated in the chart below.

Better monetary policy (something which has more to do with the Fed (Volcker) than Reagan) was fundamental to the “conquest” of inflation seen in the next chart, which certainly had a role in reducing economic volatility.

And “lo and behold”, see what those changes did to the stock market. Note that during the 17 years from mid 1965 to mid 1982, the S&P didn´t “budge”. During the next 17 years, to mid 1999 it increased by a factor of 14! And no, it was NOT a “long-running bubble”.

So yes, the Reagan years were “special” in the sense that they ushered in a “different era”. Unfortunately Bush Jr, Obama & Bernanke “tried hard” and succeeded in “putting it all to waste”.

5 thoughts on “REVEALED: The ERRORS on “The truth about Ronald Reagan´s economic growth miracle”

  1. Pingback: REVEALED: The ERRORS on “The truth about Ronald Reagan´s economic growth miracle” « Economics Info

  2. In fairness to Weisenthal he is answering the post Pouthokoukis wrote which was about growth not price stability.

    He can;t answer a post that wasn;t written-about price stability.

    I’m not clear how Obama has destroyed price stability-or even Bush Jr who I;m no fan of did that. If the S&P is your guide it has been up markedly since he’s been in office.

    • The point is that it was never about growth! Pouthokoukis chose a “fantom” topic and JW responded as if it was “real”. And note that for 17 years the S&P was on an upward trend. Today, 12 years later, it´s value is still below that peak! There´s been no trend, just fluctuation. And what B,B&O “destroyed” was macroeeconomic stability.

  3. “Better monetary policy (something which has more to do with the Fed (Volcker) than Reagan) was fundamental to the ‘conquest’ of inflation seen in the next chart, which certainly had a role in reducing economic volatility…..”

    Volcker certainly implemented and directed the policy but in his autobiography he gives high praise to Reagan for telling him to do what needed to be done, knowing the recession it would produce, and over the objection of Reagan’s political advisers — noting a clear distinction from prior presidents in this regard.

    Without that it wouldn’t have happened. See the Fed’s record during the prior 15 years.

    • Jim, you´re quite right. maybe because of space I glossed over it. It was very different from the subservient posture of Burns towards Nixon and Nixon´s obsession, given his 1960 loss to Kennedy due to the 1960 recession, about the state of the economy near election time.

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