The Recovery In Perspective (Again)

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In tonight's Presidential debate, the moderator Chris Wallace stated:

Secretary Clinton, I want to pursue your [economic] plan, because in many ways it is similar to the Obama stimulus plan in 2009, which has led to the slowest GDP growth since 1949.

[Entire transcript here]

Oops. I don't know where Mr. Wallace learned his economics. I think he's got the causality wrong - the big stimulus was a response to a deep recession and big negative output gap. Time to consult data (like the data mentioned in Monday's post) on the question of what we should have expected in terms of growth.

The question is whether the economy is outperforming what should have been expected in the wake of a financial crisis following excessive credit growth. Jorda, Schularick and Taylor (JMCB, 2013) addressed this question (ungated 2012 wp), and provided their assessment, based upon a cross-country econometric analysis. The US experience was placed in context in their Figure 3 (see discussion in this 2013 post).

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Source: Jordà, Schularick and Taylor (2012)

The US was outperforming what was to be expected in the wake of a recession combined with a financial crisis occurring after a credit boom. It struck me a useful exercise to update this graph. I eyeballed the lower and upper bounds, and show per capita real GDP through 2016Q2 (with the WSJ forecast for 2016Q3).

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Figure 1: Log real GDP normalized to 2007Q4 (blue), predicted GDP - value of 0.5 corresponds to the difference between the actual level (1.74) and the mean of excess credit in the F bin (1.26) (purple), predicted GDP - value of 2.75 corresponds to the difference between the estimated excess credit for both conventional and shadow systems (5.0) and the mean of excess credit in the F bin (1.26) (red). 2016Q3 value of real GDP is based on WSJ October 2016 mean forecast and population growth through 2016Q3. Source: BEA, WSJ October 2016 survey, Jordà, Schularick and Taylor (2013), and author's calculations.

In other words, economic growth, as measured by GDP, has outperformed the counterfactual based upon a rigorous and comprehensive statistical analysis. As I noted four and a half years ago, criticisms of an overly slow recovery are based upon an approach that conditions on depth of recession, but not on financial crisis/credit boom.

Editor's note: This article was originally published on October 19, 2016, by Menzie Chinn here.