Last year, Dietrich Vollrath published “Fully Grown - Why a stagnant economy is a sign of success”.
Rather than a sign of economic failure, our current slowdown is a sign of our widespread economic success. Our powerful economy has already supplied so much of the necessary stuff of modern life, brought us so much comfort, security, and luxury, that we have turned to new forms of production and consumption that increase our well-being but do not contribute to growth in GDP per capita.
His starting point is a version of this chart, portraying US per capita growth, with his sample ending in 2016.
And argues:
The “growth slowdown”, then, refers to this drop in the ten-year average growth rate around 2006, and that drop implies that growth rates dropped starting in the late 1990s and early 2000s
This last is simply not true. For example, from 1998 to 2006, one-year growth averaged 2.2%, implying there was no drop in average growth starting in the late 1990s. The big drop in the 10-year average growth can be wholly attributed to the steep drop in 1-year growth in 2007-09.
As usually happens, just after his sample ended in 2016, 10-year average growth has accelerated and was at 1.6% by 2019. The Covid19 shock has certainly put a stop to that trend continuing into 2020.
On page 1 of the book Vollrath writes
In the aftermath of the financial crisis and Great Recession, one of the noticeable outcomes was a lack of acceleration in economic growth. From our past experience, we would have expected to see several quarters, if not several years, of above average growth rates as the economy clawed back what it lost during the crisis…
Being a growth theorist, he took the “lack of acceleration in economic growth” to be of a structural (permanent) nature, to be explained by changes in the fundamental determinants of growth.
I´ll explain the lack of growth acceleration after the crisis from a business cycle, i.e. monetary policy perspective.
To make the argument clear, I´ll include two other countries, UK and Spain, that have different histories and structure.
Compared to Spain, the UK is an “island of stability”. Some big YoY moves in the 70s reflecting the Labour Party´s mismanagement of the economy. From 1998 to 2006, 1-yr per capita growth averaged 2.5%, so the fall after in the 10-yr average after 2006 is, like in the US, wholly due to the big drop experienced in 2007-09 and the absence of “make-up” policy
In Spain you see the post-war recovery (aided by US help in the 50s) and the political turmoil following the end of Franco´s dictatorship in 1975. In 1982, Felipe Gonzales, with a strong parliamentary majority, managed to introduce positive economic reforms that positively impacted per capita growth. In 1986 Spain was accepted as a member of the European Union.
From 1998 to 2006, 1-yr per capita growth averaged 2.7%. The drop in the 10-yr average after 2006 also wholly reflects the deep fall in growth of 2007-09. Due to ECB monetary mismanagement, the drop was extended to 2012!
It is simply unbelievable that the stagnating economy in all these countries (and in several others) is a “sign of success”. I posit it is much more likely a sign that in all of them monetary policy was tight, blocking the “make-up growth” observed after previous economic contractions.
The best monetary policy can do is to keep nominal aggregate spending (NGDP) growth on a stable level growth path. By stabilizing NGDP on this level trend path, the central bank will strive to offset changes in velocity (money demand).
The charts below show that in the twenty years to 2006, central banks were mostly successful, with NGDP hugging the trend level path. After that, almost simultaneously, all central banks “let the ball drop”, with the level of NGDP falling significantly below the previous path.
In Spain, which shares a central bank with several other countries that have different needs, the fall was bigger and more persistent, explaining why per capita growth remained significantly lower than in the other two countries.
The event that generated this synchronous tightening of monetary policy in all the countries considered, was the combination of inflation targeting central banks and the rise in headline inflation from the oil price shock.
The oil price shock began in 2004, and intensified in 2007-08. During the first leg of the shock, all central banks kept NGDP growth reasonably stable, helping to minimize the propagation of the shock to the real economy. About 2007 they all said “enough” to the rise in headline inflation above the targets, even though core inflation (which strips out energy prices) remained relatively stable.
The consequence of that error, which persisted because no central bank dared make up for the loss, again due to fears of inflation, cannot be a “stagnant economy that is a sign of success”!
From the title, the Fed could have commissioned this book
re: "By stabilizing NGDP on this level trend path, the central bank will strive to offset changes in velocity (money demand)."
Money demand is primarily a function of bank-held savings. Banks don't lend deposits, so savings impounded in the banks destroy savings' velocity. This is made quite clear using Dr. Philip George's equation: the ratio of M1 to the sum of 12 months savings.
http://www.philipji.com/
SEE corrected money supply vs. recessions
FDIC insurance is at $250,000. The FED remunerates IBDDs providing the banks with a preferential interest rate differential in favor of the banks over the non-banks (the opposite of Reg. Q ceilings which favored the thrifts). This inverts the savings investment process. And all interest rates are deregulated, all of which destroys savings velocity.
All of this was predicted in 1961. See: “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43
“Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386