In the last few days New Arthurian (NA) critiqued a few of my posts. I sent him an e-mail which he published. Jazz Bumpa at Angry Bear has made fresh critical comments. Here I´ll concentrate on the two Part JzB post.
In Part I Jazz Bumpa looks at real growth and concludes:
The point of all this is to demonstrate that there is more of a difference between the pre- and post 1982 periods than simply a volatility reduction. There is also a decline in RGDP growth, if you dig into the numbers to find it. The Great Moderation really was the Great Stagnation. And it culminated in the Great Recession.
In Part II he looks at volatility and ends:
As I said, I think the Great Moderation is a myth. It’s entire existence is predicated on 2 things: 1) a brief ultra-high volatility blip due to a double dip recession; and 2) completely ignoring the existence of the first little moderation.
But what’s happened since is truly remarkable. We now have what some people consider to be [and applaud as] remarkably stable GDP growth. But what we actually have is the lowest non-recessionary GDP growth ever recorded, coupled with historically high RSD. This is a truly ugly economic environment. Anyone graduating now is the unluckiest of all.
In my view he complicates things. RSD in his last sentence stands for “Relative Standard Deviation”. In statistics lingo that´s the “Coefficient of Variation” (the ratio of the standard deviation to the sample mean – the inverse of the signal/noise ratio). Splicing periods to conform to presidential administrations is not very useful (for example, measures/policies of one administration can have most of their effects on the subsequent one). To top it up I think his charts are very hard to read. For example, this one on RGDP growth and Volatility:
Graph 1 is a scatter plot of Standard Deviation [St Dev] vs RGDP growth over an 8 year period. The X-axis value is the average RGDP over the previous 8 years [32 quarters] while the Y-axis value is the standard deviation of RGDP growth over the identical period. There’s nothing magical about using an 8 year period, you get a similar picture using a 15 year period.
I don´t really understand his choice of periods. Why 8 ears? JzB gives a reason:
When I looked at the 15 year graph I noticed something that made me want to use an 8 year period, and that is the data trend over presidential terms.
Choosing ‘epochs’ to subdivide a (long) period of time is always somewhat arbitrary. I chose ‘epochs’ that are ‘popular’. There´s the “Golden Age” (from the mid-1950s to late 1960s); the “Great Inflation” that extends from the late 1960s to the early 1980s, the “Volcker Disinflation” (I prefer “Volcker Transition”) that goes from the early 1980s to 1986, the “Great Moderation”, from 1987 to 2007, and the “Great Recession”, in which we still live.
And I chose to show both real growth and its volatility on single chart, akin to a ‘phase diagram’. Each point in such a diagram relates real growth in quarter (t-1) to real growth in quarter (t). Such a diagram is visually appealing because you quickly get an idea of the degree of dispersion (volatility) of growth. The chart below shows this for the four ‘epochs’ defined. The circle (of same size and position in all the panels) shows that during the “Great Moderation” real growth was pretty stable, with most of the points contained inside the circle. That´s clearly not true for the other ‘epochs’.
During both the “Golden Age” and the “Great Inflation”, for example, growth is very volatile (spread out over the space). In the first case there´s a predominance of ‘high’ rates, while in the second case ‘low’ rates predominate. More popularly, during the “Golden Age”, ‘booms’ are frequent while during the “Great Inflation” ‘busts’ lead. Note that the “Great Recession” is all ‘bust’!
What´s behind that configuration of different economic ‘states’? Since real growth is the outcome of nominal growth and inflation, it is natural to investigate nominal stability. And since it is the Fed that imparts nominal stability I chose to divide the periods according to the different Fed Chairmen. Interestingly (but not surprisingly) the degree of nominal stability/instability (low/high volatility) matches up well with periods of low/high real growth volatility. In the chart I call Nominal GDP growth the “Genie”. The Fed can either keep it ‘locked’ inside the ‘bottle’ or let it ‘escape’ either to the ‘northeast’, which defines an area of rising nominal spending growth (usually accompanied by rising inflation) or, as it did more recently, in the ‘southwest’ direction, which is associated with falling nominal spending growth (usually accompanied by falling inflation).
One conclusion: To equate the “Great Moderation” to a “Great Stagnation” is quite inappropriate (to say the least). And to imply it was behind the “Great Recession” is to forget the role of the central bank in maintaining nominal stability.
My punch line: The obsession of policymakers in the 1960s with unemployment led to the “Great Inflation”. Bernanke´s obsession with inflation paved the way to the “Great Recession”.
There´s only one ‘productive obsession’ to wit, the sole focus of the Fed on providing nominal stability and preferably in the guise of a stable level path for NGDP.