Thursday, February 2, 2012

Are We Not Returning to the Trend?

There’s a so-so piece on a problem we’ll be covering over the next month or so in the January 27th issue of The Wall Street Journal. The article is entitled “Recovery Doesn’t Feature Typical Snapback In Growth”, and it contained this graphic:

The issue we’ll be discussing is whether the economy does return to a trend line, and whether or not that question can even be answered.

The article is only so-so because it conflates some issues. For example, towards the top the authors say:

Economists note that while output, adjusted for inflation, is finally back to its pre-recession level, it still falls short if adjusted for population growth.

So, the author is correctly pointing out that if we’re going to feel better about the economy, it’s real growth has to at least cover population growth. But further down the authors note that

Population growth has slowed. And the gradual retirement of the baby boom generation means that the work force is shrinking as a share of the overall population. That will tend to slow the economy's natural rate of growth.

This is an argument for aggregate real growth being lower, but having a lower hurdle to clear because population growth is lower. That isn’t the same thing.

Also, scroll back up and look at the graphic. Note that the vertical axis is not on a log scale. This will tend to accentuate the deviation on the big end.

Further, that deviation on the big end is based on the orange curve, which is a forecast. Note that it isn’t really made clear that it isn’t real data, and we can’t be sure where it actually lies.

All in all, it’s an interesting and worthwhile point, but it’s badly done.

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