John Taylor On Poor Policy And This Recovery's Broken 'Plucking' Model

Tyler Durden's picture

It feels different this time. It also 'looks' different this time in that our 'recovery' just is not bouncing back from its Friedman-ite 'plucked' level to rise phoenix-like back to Potential GDP - as it is 'supposed' to. In an excellent two-part animated series, Stanford's John 'Rule' Taylor and Russ Roberts discuss this recovery's differences along many variables including GDP trend reversion, percent of the population that is working and, economic growth overall. They then go on to discuss potential reasons for this sluggish recovery; the ongoing slump in construction employment, the effect of housing prices on saving and spending decisions by households, and this recovery's having been preceded by a financial crisis. Taylor rejects these arguments, arguing instead that the sluggish recovery can be explained by poor economic policy decisions made by the Bush and the Obama administrations. Simple, clear, 20 minutes of Sunday evening preparation for the week.


The Numbers Game: Part 1 - The Economic Recovery (It's Different This Time)

1) What is potential GDP? (0:52)
2) The economy never catches back up to trend (2:38)
3) The 1981 recession (3:16)
4) Is there a correct or potential level of GDP? (4:45)
5) A look at past recoveries (6:13)
6) Friedman and the Plucking Model (8:10)
7) A look at real growth rates in recoveries (8:59)
8) Employment and the recovery (10:20)



1. 2008-09 and 1981-1982 Recession & Recovery Charts:
Real GDP (GDPC1) downloaded from FRED 7/13/12, taken from -
Potential GDP (GDPPOT) downloaded from FRED 7/13/12, taken from -


2. 1907-08 and 1893-94 Recession & Recovery Charts:
GDP data from NBER, compiled by Nathan Balke and Robert Gordon with adjustments by John Taylor for comparability with earlier charts - Potential GDP calculations by John Taylor using a Hodrick-Prescott trend.


3. The Plucking Model Working Paper:
The "Plucking Model" of Business Fluctuations Revisited by Milton Friedman Working Papers in Economics, E-88-48 -- Hoover Institution, Stanford University


4. Growth Rate of Real GDP Chart:
Growth Rate calculated from Real GDP (GDPC1) downloaded from FRED 7/13/12, taken from -


5. Change in the Percentage of the Population that is Working Chart:
Employment-Population Ratio (EMRATIO) downloaded from FRED 7/13/12, taken from -


The Numbers Game Part 2 - The Economic Recovery - Why It's Different This Time!


1. Construction Sector Employment Chart:
Bureau of Labor Statistics- Series CES2000000001, Seasonally Adjusted


2. S&P/Case-Shiller Home Price Indices Chart:
S&P Dow Jones Indices and Fiserv 9-25-12 -


3. Personal Saving as a % of Disposable Income Chart:
BEA NIPA Table 2.1 line 36


4. 2008-09 and 1981-1982 Recession & Recovery Charts:
Real GDP (GDPC1) downloaded from FRED 7/13/12, taken from -
Potential GDP (GDPPOT) downloaded from FRED 7/13/12, taken from -


5. 'Deep Recessions, Fast Recoveries, and Financial Crises: Evidence from the American Record' by Michael D. Bordo and Joseph G. Haubrich -


6. 1893-94 and 1907-08 Recession & Recovery Charts:
GDP data from NBER, compiled by Nathan Balke and Robert Gordon with adjustments by John Taylor for comparability with earlier charts - Potential GDP calculations by John Taylor using a Hodrick-Prescott trend.


7. 1933-36 Great Depression & Recovery Chart:
GDP data from NBER, compiled originally by Nathan Balke and Robert Gordon -


8. 1929-1940 Unemployment Rate (% of Labor Force) Chart:
Historical Statistics of the United States (Millennial Edition) - Table Ba470-477: Labor Force, Employment, and Unemployment, 1890-1990 -


9. 'An Empirical Analysis of the Revival of Fiscal Activism in the 2000s' by John B. Taylor -


It seems perhaps mom was right - if you pluck (the economy) too hard or too many times (keynesian boom-bust) then your tool (monetary policy - for those not following along) may just become impotent.

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UP Forester's picture

Things are totally screwed, move along....

Muppet of the Universe's picture

This video does not properly explain anything.  Watch Stefan Molyneux - Freedomain Radio.  In his video library/playlists, he discusses exactly what happened during the Great Depression, and how the state involves itself in creating and extending the collapses.  To not watch his videos, is to know nothing.

BigJim's picture

 ...This video does not properly explain anything.

What's interesting to me is that, despite Roberts' mention of Hayek's suspicion of Potential GDP calculations, neither he nor Taylor seems to be aware of why financial-caused recessions 'work' - they allow the liquidation of mis-allocated capital and the devaluation of assets that became mis-priced during credit booms.

Maybe they'll discuss this in Part III...

dolph9's picture

It's amazing that people can still pretend to discuss these things without talking about:

1)  peak oil and peak resources generally (an increasingly larger amount of people chasing a diminishing real wealth supply)

2)  the Treasury bubble and the bastardization of fiat money

3)  widespread, systemic corruption which is never prosecuted but merely papered over

4)  the devaluation of labor and the inevitable rise of the dependent classes, who make the perfectly rational decision to game the system rather than work for it


I have a strong distaste for these academic discussions which pretend that the world is peaches and roses, so why doesn't everything taste and smell good.

wardawg12's picture

Agree Dolph9. Perhaps if they want to invite Bill Black to their discussion,he might be able to provide clarity to their intellectual circle jerk.

Urban Roman's picture

If the peak oil curve matches Hubbert's sketch, we should be getting to the steep part of the decline within the next five years or so. Maybe hitting it right now.

After that, it's about eight or ten percent per year decline in the global economy. And in the past, the economy has closely followed hiccups in the oil supply.

Heyoka Bianco's picture

5) Too damn many people, made possible by boredom and cheap energy, soon to be doomed by anger and no energy except FIRE!

bunnyswanson's picture


As a candidate for president, Obama was largely skeptical of the Bush administration's free trade policy. He questioned the wisdom of NAFTA and other FTAs, and argued that the agreements did not include adequate safeguards for American workers.

However, amid the slow U.S. economic recovery, Obama expanded his economic growth strategy to include a greater focus on trade. During his 2010 State of the Union address, he announced the National Export Initiative. The plan outlined a strategy to double U.S. exports within five years (NYT), creating two million new jobs. The administration is so far on track with its plan, with many economists saying that rising U.S. exports--which are at $180 billion per month--have been instrumental in helping the U.S. combat its economic malaise. Notably, farm exports hit $137.4 billion for fiscal year 2011, while petroleum products reached $90 billion.


 Since the Great Recession began, there has been no shortage of scorn for the state of global economic governance among pundits and scholars. However, in this International Institutions and Global Governance program Working Paper, Daniel Drezner concludes that, despite initial shocks that were more severe than the 1929 financial crisis, the evidence suggests that these structures responded to the financial crisis robustly. Global trade and investment levels have recovered from the plunge that occurred in late 2008. Existing global governance structures, particularly in finance, have revamped themselves to accommodate shifts in the distribution of power. The World Economic Forum's survey of global experts shows rising confidence in global governance and global cooperation. In short, international financial institutions passed the stress test.


Council of Foreign Affairs

How is CFR funded?

CFR's annual operating revenue comes from the following sources (FY11 data):

Gifts and grants (individuals, foundations, corporations) 34% Investment income 24% Foreign Affairs 14% Corporate membership and related income 13% Membership dues 11% Rental income 4%

CFR is an independent, nongovernmental, nonprofit, and nonpartisan organization and does not receive any funding from the U.S. government or foreign governments. A complete list of donors is published each year and is available upon request.


Who can wrap their minds around the reformation of their country, leaving them to compete with labor force who can live on a couple dollars a day.  You cannot do that in America.  It is illegal to be homeless in America, in fact.  


Everything is going just as planned.  Finding solutions is unnecessary because there isn't a problem to solve.  The middle class are never going to see the return of their middle income lifestyle.  They'll deplete their savings and generations of acquired assets.  Their inability to consume (shop) along with cost effectiveness of going overseas when at all possible for labor will over the next 50 years, leave America a land that will I believe, resemble the maps on the Agenda 21 website.  Concentrates areas near off ramps. 


Your grandchildren will curse you. 


Leading Experts on National Security, Religion, and International Economics Join CFR

October 10, 2012
Council on Foreign Relations



October 10, 2012—The Council on Foreign Relations (CFR) Studies Program welcomed several new scholars to its roster.

Robert Kahn is the Steven A. Tananbaum senior fellow for international economics. Kahn has held positions in the public and private sectors, with an expertise in macroeconomic policy, finance and crisis resolution. Prior to joining CFR, Kahn was a senior strategist with Moore Capital Management, where his portfolio spanned G-7 monetary and fiscal policy, regulatory reform, debt policy and debt workouts, and the crisis in Europe. Prior to that, he was a senior adviser in the financial policy department at the World Bank, where he focused on financial sector assessments for developing economies. Kahn also held staff positions at the International Monetary Fund, where he worked on public policy and the resolution of debt crises in emerging markets. He was also a senior economist at the Council of Economic Advisers from 1990 to 1991, as well as the Federal Reserve Board from 1984 to 1990 and 1991 to1992.

Reza Aslan is adjunct senior fellow where he is leading a roundtable series on religion in the Middle East. He is the founder of, which is an online journal for news and information on the greater Middle East. Currently the Wallerstein visiting professor at Drew University, Aslan has also taught at the University of California, Riverside, the University of Iowa, and the Iowa Writers' Workshop. Aslan is the author of the bestselling No God But God: The Origins, Evolution, and Future of Islam. He received a PhD in sociology of religions and global studies from the University of California at Santa Barbara. He also holds degrees from the University of Iowa, Harvard University, and Santa Clara University.

Carla Anne Robbins is an adjunct senior fellow, and is leading a roundtable series on national security in an age of austerity. An award-winning journalist and foreign policy analyst, Robbins was deputy editorial page editor at the New York Times and chief diplomatic correspondent at the Wall Street Journal.  Berkeley. She was a Nieman fellow at Harvard.

In addition, CFR hosts a class of visiting fellows each year. This year's fellows include:

Military Fellow—Julian Dale Alford, U.S. Marine Corps

Military Fellow —Peter A. Garvin, U.S. Navy

Military Fellow —Brian M. Killough, U.S. Air Force

Military Fellow —John S. Kolasheski, U.S. Army

Military Fellow —Peter Troedsson, U.S. Coast Guard

National Intelligence Fellow—Paula Briscoe, Office of the Director of National Intelligence (ODNI)

Edward R. Murrow Press Fellow—Pir Zubair Shah, New York Times

Stanton Nuclear Security Fellow—Andrew J. Coe, University of Southern California

Stanton Nuclear Security Fellow—Gregory D. Koblentz, George Mason University

Stanton Nuclear Security Fellow—Jane Vaynman, Harvard University

International Affairs Fellow—Jeanne Hull, U.S. Army

JuliaS's picture

Agree with all points. What should be mentioned is that with every recession and every perceived recovery something was lost never to be recovered. 100 reserve ratio gave way to 10% reserve ratio. Then it became <1% reserve ratio, then no ratio at all. Oil production peaked, then we defaulted and started importing, then imports peaked, then demographics peaked then... everything peaked.

Each recession was a result of us hitting some finite limitation. Each time we went on, pretending like it didn't happen or didn't matter.

No recovery ever took place, period! We either ran out of resource and went onto another one... or 1 bread earner became 2, or our economic allies were bombed into oblivion by the Axis, eliminating competition, or we bombed someone else into submission ourselves, or Glass Steagall was repealed, or the Partiot Act signed and so on and so forth.

 In my memory there were no recoveries - only transitions from bad to worse... with enough bread and circus to keep us distracted.

Nage42's picture

Excellent points.

I'm sure there are numerous memes we can farm here, but let's give it a shot:

"Everytime we kick the can down the road, we lose a bit of foot."

"Either you carpet-sweep, or you carpet-bomb; either way the bodies have to be hidden somewhere."


"The economy stays strong by feeding it sacrifices at the alters to our politicians."


Anything in there worth keeping?




Urban Roman's picture

Never catch on, too long for a bumper sticker.

honestann's picture

No kidding!

The other huge atrocity is adopting measures like CPI, "dollars" and "unemployment" that mean very, very, very different things at different points in history... precisely because the predators-that-be have jiggered the measures to MISLEAD.  Thus anyone who adopts, plots and considers those jiggered measures is purposely being disingenuous and is guaranteed to end up with grossly misleading conclusions.

BigJim's picture

 ... Thus anyone who adopts, plots and considers those jiggered measures is purposely being disingenuous and is guaranteed to end up with grossly misleading conclusions...

I agree they'll end up with grossly misleading conclusions... but, having met a few of them, I've come to the conclusion that a lot of thier seeming disingenuousness is genuine - they've spent 10 years in academia, where, to be successful, they've been obliged to churn out ever more rarified abstrusions of conventional wisdom. Many of these people are very smart, but not very enquiring - so, for instance, if you ask them to comment on the relationship between - say - recessions caused by 'austerity', and GDP and monetary inflation in a polity where the government directly spends 50% of GDP, they'll look blank, then panicked, then relieved when they can trot out some sloganeering generality. They never look deeper than the surface, which they have had mapped out in exquisite detail for them by others, most of whom have also never looked very deeply under the surface either.

I'm sure there are genuine evil masterminds out there... the Cheneys and Rumsfelds, for example, but I'm beginning to suspect most of the 'Elite' genuinely believe  the nonsense they trot out. They just don't have the time or inclination to question their programming. And why should they? They're doing very nicely, thank you.

Acet's picture

That's all part of the "increasing corruption" problem.

The way I see it, what's happening now is the first fall of an Empire (the US) ever which is occurring in a highly integrated, globalized World of fast communications and fast travel. The increased corruption, loss of trust in public institutions, distorted political process and overall sloth and lack of initiative in the population (especially at the lower levels - welfare dependency - and the highest - subsidy dependency) are all signs of the cultural decay and rot from the inside, a typical cause of collapse for empires.

I would expect that the only thing in history which is anywhere close to this would be the fall of the Roman Empire and that took 3 centuries since at that time travel and communications where much, much slower.

In that sense, what we have now is a social problem rather than an economic problem, which is why mainstream Economic explanations cannot explain it (maybe Bahavioural Economics can).

BooMushroom's picture

A political problem indeed. Any high school freshman could balance our budget on paper. But any time someone tries to cut spending, it's "why do you hate ___?"

honestann's picture

Why do you hate --- people who work, produce and earn a living?  Why are the only people that it is okay to hate the people who work and earn a living?

disabledvet's picture

Academia has no problem talking about the annihilation of labor. That's what gets them their big paychecks from Wall Street. The problem is why Wall Street...whose sole remaining bank is now going all in on The EZ ironically enough (is there any more Givernment intervention than there?) thniks by throwing US labor "flexibility" under the table is winning. How much time does an American spend looking for work? A LOT. How efficient is that? Get the guy a friggin' job okay? Where are these "new industries in need of new labor" again? Hahahahahaha. Certainly not financial services! The mismatch between Goverment "survival outlays" and where the growth actually is has never been greater. Mass STATE bankruptcies must be the result.

Offthebeach's picture

Fedgov and states are bankrupt, but they have the printing press which they have cut-in the financial class to fund their swooping up cash/liquidity starved assets of the muppets.
So buddy- buddy there.

The question is how do you keep the muppets going to the crooked casino, again and again?

Federal and other debts are genius because young muppets are in the whole and begging for crumbs right from the get go. Not personally remembering previous generations liberty and opertunities.

Yen Cross's picture

Hey anyone seen my lost "  Cassowary"?

Yen Cross's picture

 Why do you have to constantly explain charts with (subtext)?  Either you can read them or / you need to learn how to read them!

Nadaclue's picture

I agree with you yen cross. If one is to play or watch this market, technicals must be considered, even though the market is manipulated.

I believe the manipulators also use technicals to their own own accord. It sounds bizarre but it is useful because so many use technicals.

I do hope that sounds logical but in a psyop mission, you use what people follow to lead them.

Yen Cross's picture

Most interbank trades have a 10 pip "s/L" behind the major res/sup level!

 Any sane trader would say, yes Yen, you understand charts.  Any smart trader wouldn't say anything!

  Come on people!  How many times do I need to outbid you?

Value-costco     VALUE- WALMART    VALUE_ AMAZON !

   I'm value retarded!

Snoopy the Economist's picture

It's called presenting results and data.

q99x2's picture

There are no good policies from Central Planners.

CPL's picture

That's because the idea has to be understandable by the dumbest in the committee room.  If it appears most central plans are writen by total morons, this is not a mistake that is the best it can ever do.

ATM's picture

Incorrect. It is because the planners are all ignorant, arrogant fucktards who believe they can suspend reality, and shape supply and demand by order. 

In other words they belive they are gods but they really are the lowest form of sub-human. They become soul-less as their planning fails. The plan becomes more important than the people and we see the results throughout history.

Nadaclue's picture

Into the dieing gasps of the economy, the braniacs fizzle away with theories and possibles. No solutions to be found, too late.

There is no Saviour to be found, deal...

Got food? Got guns? Got owned land, close enough to gorilla but fer enough to be out of the hordes way.

Only then, is one ready.


Edit: I would like to add that what is coming, is going to be absolutely fucking unbelievably miserable, compared to life as we now know it.

Prepare yourself mentally for it cause it's going to be ugly, like you've never seen before.

Hedgetard55's picture

+55 trillion, brother.

 Hate to say it but I am going to laugh at the fools when SHTF, even as I go under with them...

Hindsight2020's picture

Russ Roberts has many great talks over at econtalk


His style can be adjitating at times but he gets some good explanations from his guests.

Pike Bishop's picture

J. H. Christ. What the F is so curious about this. Parts I and II, I didn't hear anything about the Fed.

After Volcker pounded the living daylights out of the remnants of the fiat conversion and the abysmal lending practices by American banks with midEast deposits to Mexico and other dictator and socialist countries in Central/South America, the Fed took its place as the Financial Uber-Planner.

And Greenspan arrived. Ayn Rand was dead but unfortunately the cold bitch lived on through this asshole. Both of them initially thrilled that her boy Greeny was going to be a member (and eventually in charge) of the fucking Bank cartel, which they had screamed their asses off about years earlier in the essay compilation "Capitalism: The Unknown Ideal".

For fellow Main Street tards, don't you remember the genesis of the term "soft-landing"? It was coined during the 1990+ crap-out. aka fucking moderation. the Greeny and the Fed believed they could predict the future with numbers, the supposed evolutionary advance over the crystal ball. Conceptually pathetically absurd, Greeny was a wimp nerd, who basically feared natural economic violence, and the ability of the the economic system to heal itself. He thought it better to smooth it out. The fuckshits at the Univ of Chicago et al squealed with glee.

Along the line of ZH's theme that there never is a free lunch, somebody somewhere in time has to pay the lunch bill... You can either pay the fucking thing off or you can do it in installments. If you fuck with the interest rates, you are choosing to pay in installments.

True to Nature and the Physical Sciences, a force is a force. High or low, its inertial momentum of mass and velocity is what it is. Once it is upon you, you can't stop it.

There are trade-offs in the ways you take it on. All you can do is trade off on amplitude and duration.

Without question, TPTB prefer a lower amplitude with a longer duration. It makes sense to people who want to get re-elected, and people who already have capital in hand. Their worst nightmare is things left to themselves, which could garner fair results. Market fairness is not even on their to-do list.

Calculated Risk has had this graph up forever. The 2 prior Recessions were clearly mitigated in amplitude. And if you think about for a second, duration is harder on the collective paycheck earner.

Not to mention that it looks like monetary pixie-dust punishment accumulates from Recession to Recession.


Nage42's picture

Anyone who's got a brain in edu'ma'cation has GOT to be able to read the writing on the wall... and they've just got to know that their gravy train is headed for a gully where the rail-tracks have been moved over to the military camp.

woolybear1's picture

but, these guys are from Stanford

dcb's picture

economists who mention corruption don't get high priced consolting gigs or swpeaking fees from the banks

Shizzmoney's picture

Taylor rejects these arguments, arguing instead that the sluggish recovery can be explained by poor economic policy decisions made by the Bush and the Obama administrations.


You won't hear this from the MSM however; can't piss off Uncle Sam and tell him he is actually the main reason (for enabling fraud by TBTF banks and mega-corporations) for the mess we are in.

Confundido's picture


"...The last error lies in believing that there is a known potential GDP. This is a mechanic, Marxist, view of human action. It ignores the role of relative prices. Does anyone believe that a firm will hold inventory or work below capacity at a loss, just out of stubbornness?  When a firm decides to lower output, or the use of resources, that decision is rationally driven, to remain profitable. The relative prices between inputs (and only one of which is capital) and output tells the entrepreneur that the apparently under-potential output is the profitable choice at hand. A potential higher output represents a potential loss..."

Schmuck Raker's picture

Good link, thanks.

"In summary, the dual mandate of the Fed assumes the correctness of the price level doctrine. But in fact the whole mode of reasoning behind the Taylor rule is a typical case of arguing in circle. Its equation already involves the assumption which it tries to prove. It is essentially nothing but a mathematical expression of the untenable belief that there is proportionality in the movements of prices, unemployment and interest rates."