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)

 

LINKS TO DATA & PAPERS REFERENCED -

1. 2008-09 and 1981-1982 Recession & Recovery Charts:
Real GDP (GDPC1) downloaded from FRED 7/13/12, taken from BEA.gov - http://research.stlouisfed.org/fred2/series/GDPC1/
Potential GDP (GDPPOT) downloaded from FRED 7/13/12, taken from CBO.gov - http://research.stlouisfed.org/fred2/series/GDPPOT/

 

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 -http://www.nber.org/data/abc/ 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
http://hoohila.stanford.edu/workingpapers/getWorkingPaper.php?filename=E-88-4...

 

4. Growth Rate of Real GDP Chart:
Growth Rate calculated from Real GDP (GDPC1) downloaded from FRED 7/13/12, taken from BEA.gov - http://research.stlouisfed.org/fred2/series/GDPC1/

 

5. Change in the Percentage of the Population that is Working Chart:
Employment-Population Ratio (EMRATIO) downloaded from FRED 7/13/12, taken from BLS.gov - http://research.stlouisfed.org/fred2/series/EMRATIO/

 

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 - http://www.standardandpoors.com

 

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 BEA.gov - http://research.stlouisfed.org/fred2/series/GDPC1/
Potential GDP (GDPPOT) downloaded from FRED 7/13/12, taken from CBO.gov - http://research.stlouisfed.org/fred2/series/GDPPOT/

 

5. 'Deep Recessions, Fast Recoveries, and Financial Crises: Evidence from the American Record' by Michael D. Bordo and Joseph G. Haubrich - http://media.hoover.org/sites/default/files/documents/Bordo-Haubrich-Steep-Pa...

 

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 - http://www.nber.org/data/abc/. 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 - http://www.nber.org/data/abc/.

 

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 - http://hsus.cambridge.org/HSUSWeb/toc/showTable.do?id=Ba340-651

 

9. 'An Empirical Analysis of the Revival of Fiscal Activism in the 2000s' by John B. Taylor - http://www.stanford.edu/~johntayl/JEL_Taylor_Final%20Pages.pdf

 

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.