The Roots of Foolishness (Wonkish)

Well so much for the predictions of “robust growth”.

Roots of evil (wonkish)

As Brad DeLong says, sigh. Greg Mankiw challenges the administration’s prediction of relatively fast growth a few years from now on the basis that real GDP may have a unit root — that is, there’s no tendency for bad years to be offset by good years later.

I always thought the unit root thing involved a bit of deliberate obtuseness — it involved pretending that you didn’t know the difference between, say, low GDP growth due to a productivity slowdown like the one that happened from 1973 to 1995, on one side, and low GDP growth due to a severe recession. For one thing is very clear: variables that measure the use of resources, like unemployment or capacity utilization, do NOT have unit roots: when unemployment is high, it tends to fall. And together with Okun’s law, this says that yes, it is right to expect high growth in future if the economy is depressed now.

But to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness. How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.

Whoops. Well okay, if we do have robust growth in 10 years I guess Krugman can claim his prediction was correct since he didn’t put a time limit on it.

FILED UNDER: Economics and Business, Quick Takes
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. john personna says:

    I never really bought into Krugman’s “we’ll need a bigger stimulus” framework, but I see his line contingent on that:
     

    And yes, we can expect fast growth if and when that capacity comes back into use.

    He probably could have bought that growth, with an extra trillion or few, but at what long term cost?  That’s the question.

    It is definitely unfair to deprive him of his choice in stimulus, and the demand of him his choice in growth.

  2. john personna says: