When World War Two ended suddenly in 1945 many economist feared another depression to the magnitude of the 30's. However, this didn't happen and the fastest growth ever seen happened during the 50's.(you can see the big spike in per captia growth in the 50's) This was fueled by the liquid assets built up during the war, but Keynesian policies got the credit. "Polite disagreement" then happened with the different schools of thought. Focus was shifted into making policies that worked.
During JKF administration and the cold war, economists became more valued in the White House and the country, at this point the boom in the 1950's needed to be explained. Economists turned to a Keynesian model now know as the Residual.
B for Sue, for some grammatical and spelling errors.
ReplyDeleteThe economics isn't great either, but that's why you get to stake out opinions without getting penalized on this blog!
So, what's the problem. First, I love the graph. But, the interpretation of it is poor. The scale on the left is logarithmic, so the slope is akin to a growth rate. Since the slope in the 50s is about the same as the slope everywhere else, growth was not faster. And, that big spike? It's World War II, not the 50's.
But Warsh is not quite right either. America did not get into a sustained boom. Not even close to that. What we got into was a period that people of a certain age, say Warsh's age, are nostalgic for. We had 5 recessions between 1945 and 1961 — a rate that would have contemporary pundits crying that the sky is falling. On average, growth was good, but it was far from sustained.
The real boom time was the period from 1983 to 2007, when we had 3 long expansions punctuated by 2 short and mild recessions.
In between those two, we had some good times. The 60's were great economically. And, believe it or not, the 5th longest expansion we ever had was under Ford and Carter!
So why did Warsh say what he did? I think it's because the period from 1945 on was distinctly better than the preceding 15 years. But, the debate about whether the period from 1945-73 was better or special relies heavily on careful exclusion of bad years: it's at least arguable that this period was no better than any other.
Extra Credit for a comment that explains what a bourse is, and what Warsh means by the bourse of public opinion.
Extra Credit to the first person who can comment about whether the scale of the graph is logarithmic, what base it is, and if this means the slope is an approximate growth rate, or something else entirely.
I forgot to add that "The Residual" does not refer to a Keynesian model, or even to a model at all.
ReplyDeleteWhat Warsh means is what is left over after accounting for the thing explained by a model (the Solow growth model in particular).
The graph is a logarithmic and is base 10 as can be seen from 1,000 to 10,000 then 10,000 to 100,000.
ReplyDeleteThe log form shows a more consistent growth rate over time. If it wasn't a log graph, it would look like we are all getting exponentially rich.
As for bourse....I am thinking he meant on the "exchange" of public opinion. As if the more the public talked about the economy and shared their opinions, the more positive light they saw economists.
ReplyDelete