When the Fed killed growth

Neil Irwin writes “We’re in a Low-Growth World. How Did We Get Here?”:

One central fact about the global economy lurks just beneath the year’s remarkable headlines: Economic growth in advanced nations has been weaker for longer than it has been in the lifetime of most people on earth.

This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent. The economies of Western Europe and Japan have done worse than that.

His “Tell-Tale” evidence comes from this chart

Fed Killed Growth_1

He certainly could have done a better reading of the evidence. First of all, the very high (but falling) average growth, especially in Europe and Japan before 1980, is a reflection of the catch-up growth following the end of WWII. This can be clearly seen by comparing real per capita output in Japan and the US from 1950 onwards shown in the chart.

Fed Killed Growth_2

By the early 1970s, Japan´s catch-up growth petered out. After 1990, per capita growth almost completely disappeared. In Irwin´s chart we see 10-year average annual growth in Japan falling off steeply.

Meanwhile, observe that per capita growth in the US and Europe during the period between the two vertical bars (“Great Moderation”) is very stable and only falls off fast with the onset of the “Great Recession”. In that sense, the low per capita growth phenomenon is “new”.

What happens when we look at real per capita growth for a long span of time. For the US the table gives the summary statistics for growth over 1850 to 2015.

1850 – 2006 1985 – 2006 2009 – 2015
Mean=2.1% Mean=2.1% Mean=0.6%
St Dev=4.9 St Dev=1.2 St Dev=1.9

During the Great Moderation (1985 – 2006) real per capita growth was the same as the previous 156 years, but growth volatility (Standard Deviation) was lower by a factor of 4, a much more “pleasant” life experience. During the recovery that began 7 years ago, it is growth itself that was reduced by a factor of almost 4.

At times during the long period of 2.1% growth, we observe periods of deep penury. For example, in 1934, in the midst of the Great Depression, the average annual 10-year per capita growth reached a minimum of -0.9%!

Then, that was the result of a massive monetary error. You wouldn´t be off to conclude that the steep drop in per capita growth at present is also the result of a less massive, but more persistent monetary error. From looking at Irwin´s chart, it almost looks like “everyone wants to be Japan”, a risk Bernanke himself warned about as far back as 1999.

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