In a recent post Garett Jones elaborates on Krugman´s 2009 ‘prediction’:
The new Econ Journal Watch piece by David Cushman checks this claim that Krugman made in March 2009:
…”t is right to expect high growth in future if the economy is depressed now.”
I’m not writing about that quote, since Cushman and Greg Mankiw have done a good job on that one. I’m writing about this claim, that when we started using unemployed capital again we’d start building GDP as well:
Krugman (March 2009):
“And yes, we can expect fast growth if and when that capacity comes back into use.”
Garett Jones then estimated the post-1967 relationship between capacity utilization and GDP growth on a quarterly (at annual rate)basis and checked to see if post-crisis the usual relationship has held: It hasn’t.
The scatter plot for the 2009Q3 – 2012Q4 period is below. With the exception of 2012Q3, in all other quarters growth has been on average less than half than that predicted by the growth of capacity utilization.
And GJ concludes:
It’s not just that the relationship between capacity utilization and growth is noisier than it used to be before the crisis: It’s that growth has consistently been less than you would’ve expected based on how many unused machines got turned back on in 2009 and 2010. Part of the story is that the service sector took a hit after the crisis, so it wasn’t the usual stabilizing force.
So during the crisis we stopped using some machines, then we went back to using them but we didn’t produce the usual amount of GDP growth overall. The recovery has been good for capital, mediocre for GDP and worse for workers.
That´s all very nice and good. But I feel queasy about his ‘distribution view’ of the recovery. The way things are it´s absolutely bad for everyone.
We can have qualms about the word “recovery” in the present context. I would think it´s more appropriate to say that the economy´s plunge has been contained and is now ‘cruising’ at a lower level. ‘Recovery’ would imply that it was moving towards the previous (even if ‘adjusted’) trend level, something that´s not happening.
I think Garett Jones falls into the common trap of analyzing things in terms of growth rates and forgetting about ‘levels’. Many times that´s OK, but not after something of the magnitude of the ‘tsunami’ that hit the economy in mid-2008. The chart illustrates.
The fall in capacity utilization (from ‘normal levels’), mirroring the fall in aggregate demand (NGDP), has been so strong and deep that it would be surprising if the ‘growth relationship’ that prevailed before held.
In defense of Krugman, he said the ‘magic words’: “We can expect growth IF and WHEN that capacity comes back into use. It certainly hasn´t!