November 15, 2006
The Expansion Compared
There was a lot of mystification why the electorate was so concerned about the economy, when aggregate measures of economic performance were signalling positive.
Just to see how this expansion compared to the previous one, I plotted log real GDP (Chained 2000$), with log GDP set to zero at the NBER defined troughs in both episodes. This procedure yields the figure below.
Figure 1: Log GDP (Ch.2000$), normalized to zero at trough, in current expansion (blue), previous expansion (green). DeutscheBank forecasts (red squares). Source: BEA, NBER, and DeutscheBank 11/10/06.
Interestingly, despite some red hot growth rates in 2003 and as recently as 2006q1, GDP performance overall is about the same as in the previous expansion up to 1996q1 -- i.e., roughly 15% (log terms) above trough levels.
I was a little surprised by this result, given the fact that the previous expansion was seen as fairly lackluster (up until around 1995-96), and the massive amount of monetary and fiscal stimulus injected into the economy during the current expansion. So after taking into account trends in real wages and real (CPI-deflated) compensation, one shouldn't be too surprised by the general disappointment with the economy's performance.
Posted by Menzie Chinn at November 15, 2006 12:40 PMdigg this | reddit
But the 1990-91 was also a weak recession followed by a weak recovery. If you compare these two cycles with earlier cycles you will find that these two are very similiar and both are very different from earlier cycles.
If you want to really see some interesting results look at real nonresidential fixed investment from the this cycle trough compared to the other long cycles of the 1960s, 1980s and 1990s.
Posted by: spencer at November 15, 2006 01:58 PM
It's amazing what a log GDP graph normalized to the trough can do for creating a linear impression of economic expansions.
Let me (possibly one of the "one"s mentioned below) chomp in here:
So after taking into account trends in real wages and real (CPI-deflated) compensation, one shouldn't be too surprised by the general disappointment with the economy's performance.
[Let it be known that I am not in that top 1% who may genuinely be surprised that others' income did not out-perform the economy.]
I feel recognized as one of those who shouldn't be too surprised by the general disappointment of those whose share in the improving economy was under-performing.
But that does not quite cover my share of the general disappointment. No, I even feel short-changed there (not exactly here by Menzie but by far less competent observers and far less compassionate moderators who do on occasion make statements about "one's" happiness and "one's" disappointments) and not surprisingly.
No, this is not one of those times when we look back fondly as say "Yes, we were poor then, but we were happy." No, the conundrum for the MSM moderators of our own happiness is that we are, despite their best efforts, not happy, (despite the disputable fact of not being poor). I wish I could say it's such a touching sentiment, but it isn't.
No, the expression 'disappointment' is as much a misstatement as referring to the Mexican migrant workers as 'illegal aliens'.
'Dissillusioned', 'disenfranchized', might be better, but I think the Mexican tag is ironically appropriate: 'alienated'. We are not participating in the benefits, nor increasingly in the activities, --the work, in this increasingly consumer/finance-led economy.
We spend the house until we don't and along the way we are vaguely unhappy.
Posted by: calmo at November 15, 2006 02:51 PM
I have a a couple of simple explanations for the disappointment, unhappiness, alienation - whatever tag one chooses. First, people aren't stupid. (There are, of course, certain conditions that need to be put on that declaration, but let's leave that for another day.) If disposable income is flat against a year ago, and was flat against a year ago a year ago, I don't need to hear that overall compensation is doing great. I don't get to spend overall compensation.
Economists look to consumption as a measure of utility, but that's just because it is easy to deal with. We know that is not the whole story. Security is a big issue. Fairness is a big issue. That is the second point. The intangibles have gone all to hell. With two of the legs of our three-legged retirement stool looking ricketty, with job security seeming at risk, with pay stagnant, many of us don't feel all that secure. With those at the top luxuriously compensated, compared with working stiffs, even if those at the top fail or break the law - golden parachutes all around - life doesn't seem all that fair. With our politicians sneeking around in our mail, trampling on the Constitution and signing no-competition contracts with their friends, with Washington the subject of a friendly take-over by K Street, life doesn't seem fair. Good old boys now have MBAs and law degrees, but it remains a good old boy world.
The people who express shock that anybody is unhappy with the result aren't shocked. They just want to make it uncomfortable to write or talk about that unhappiness. Unity in that unhappiness could lead in a disadvantageous direction. Disadvantageous for the advantaged, that is.
Posted by: kharris at November 16, 2006 04:43 AM
Is not this more a story about the distribution of income? In particular, while mean incomes have been going up nicely, median income has not been performing all that well thanks to so much of the growth going to people at the very top of the income distribution. And we all know that it is the median voter who determines election outcomes.
Posted by: Barkley Rosser at November 16, 2006 07:02 AM
Posted by: pat at November 16, 2006 03:02 PM
One explanation that makes great sense to me and many other commentators is that the media and our intelligensia have been pumping out doom-and-gloom ever since we got a Republican president.
While our personal finances must be doing more than OK (otherwise why the grousing about big SUVs and McMansions?) and unemployment is objectively about as low as it can go without becoming inflationary, the "story" has been about generalized anxiety and "it can't last".
Suddenly, with a Democratic Congress, the "story" is changing. Happy Days are here again!
Too many people still trust the mainstream media for information about the wider world and aggregrate trends. It is clear that they've abused that trust and no longer deserve consideration or cash.
I think the above meets the Occam's Razor test.
Posted by: Joseph Somsel at November 16, 2006 04:19 PM
Please, please don't come here and try to sell talking points from the RNC. There is nothing new, or balanced, in your post. You have ignoring the other comments here and repeating the standard White House line. Tony Snow couldn't have done it better himself.
Do you really believe people are less aware of their own circumstances than pundits and spinners? Do you really think that with Limbaugh/Snow/Hannity/Kudlow/Mankiw busy, busy, busy, and a national press that says in front of the whole world that its job is to be a megaphone for the White House, that some unnamed "intelligensia" has a disproportionate advantage is crafting public sentiment? Mightn't the public have just a tiny bit of influence over its own sentiment?
If you don't understand why people are discouraged, you can open your mind to the possibility that you haven't listened hard enough to what their worries, or you can spin. Looks like time to switch horses, and listen.
So, here it is again. Consumption doesn't equal well-being, except for live-in-the-moment types, most of whom these days seem to be supporters of the GOP line. Prospects for retirement are bad. Income distribution is bad. Job security is perceived as bad. Health care costs have been shifted onto workers in a way that makes measures of compensation somewhat dubious as measures of disposable income, which has only risen on a real basis in the past couple of months, after a long stretch of flat to negative readings. Yes, you can indentify measures that suggest people should be satisfies. You don't have to, though, because those measures have been identified for you by supporters of the GOP line. Time to recognize that there are also measures which show why people would be dissatisfied.
Which set matters more? I'll trust voters on that point.
Posted by: kharris at November 17, 2006 05:04 AM
The Professor has made a rather tortured attempt to clear away the "mystification" of why people are anxious about the economy in spite of the objective evidence to the contrary.
A review of the Professor's own earlier postings and pre-election media converage shows repeated attempts to find something, anything, unsavory in the punchbowl that is our economy.
There is a justifiable worry abroad about the future but it is about the coming clash of cultures. A world war is brewing and people know that in spite of attempts by the US elites to minimize it. I would propose that the media and the intelligencia are trying to displace that anxiety from war to the economy.
Business cycles have not been banished and utopia has not been achieved. The war and energy are crucial issues for the future.
However, ad hominem arguments ("talking points from the RNC") are ultimately unpersuasive. Even Instapundit notes the change in coverage on the economy.
Posted by: Joseph Somsel at November 17, 2006 08:47 AM
Joseph Somsel: I think by "the Professor", you mean me (although it could refer to other people who have written comments on this post). Hence I feel compelled to respond. You can take the post as a "tortured attempt", or merely trying to add one more piece of evidence to the growing pile of data at the disaggregate, micro level of mediocre economic performance.
Since you accuse me of being a biased in favor of finding "unsavory" things in the punchbowl that is the economy, I think it right and proper that I undertake a quantitative assessment of your assertion. Going back to beginning-October through the day before the election, I find:
- Two posts on comparing employment figures, including discussion of conservatives' preferred measure of household based employment (11/4, 10/9).
- One post on estimating U.S.-China trade elasticities (11/2).
- Three posts on tabulation of costs incurred in the Iraqi theater of operations (10/31, 10/22, 10/12), reporting data from the U.S. Congressional Research Service and DoD. In not a single one of the posts was a position taken with respect to what optimal policy would be.
- One (literally textbook) discussion of the time series characteristics of business fixed investment at the business cycle frequency (10/30).
- One post on the constraints on U.S. monetary and fiscal policy if the economy were to go into a recession (10/26).
- Tabulation of the fiscal exposure of the state, using a table sourced from the U.S. Government Accountability Office (10/24).
- One post on the fiscal deficit, using data from the U.S. Congressional Budget Office (10/18).
- One post reporting econometric estimates of the elasticity of response between the current account balance and the fiscal balance (10/4).
- One discussion of how trade costs are endogenous with respect to energy prices (10/2).
I'd just like to point out that being objective doesn't mean giving 50-50 coverage positive and negative developments. I could wax endlessly about the benefits to society of mobile telephones; but since there is no corresponding pressing policy-related action-item, there seems little need to talk about them. Perhaps the next time I do a post on global climate change, I can talk about the increment to world GDP that will occur when container ships can navigate through the Arctic Sea without impediment. But I think it would be right and proper to juxtapose that against the other benefits and costs of that development.
Parting remark: Economists typically employ as a baseline (even if they deviate in their academic research) some version of rational expectations, i.e., agents use the all available information to make judgments about their own situation and the future. The behavioral economics literature has tempered that tendency in the profession. But I'm not sure I know of such a model that would say the media drives general views on the economy over long stretches of time. If you know of such empirical (preferably econometric) research, I would welcome hearing about it.
Posted by: menzie chinn at November 17, 2006 12:13 PM
If you don't want to be mentioned in connection wtih RNC talking points, don't use them. And I'm not sure why "even Instapundit" carries any weight.
Look. Other views were offered here before you showed up, mine included. You dismissed them by assertion, rather thay by offering evidence, or maybe just ignored them. Apparently, things just are the way you say they are. Sorry, but that won't wash. Got any evidence? Ya know, the sort of evidence that would make an extended period of falling real weekly income go away? The sort of thing that would make employment in the housing sector and Big 3 auto factors stable? The sort of thing that would bring down record household debt burden ratios? 'Cause from what I hear, these sorts of things do make people uncomfortable. Or are you just going to point at the jobless rate and say that's the whole story?
Posted by: kharris at November 17, 2006 12:16 PM