I’m reluctant to even do this post, as the GDP figures keep getting revised downward, suggesting my former comments are “inoperative.” Fortunately for me the revisions keep strengthening my argument. First the BEA said NGDP fell about 2% between 2008:2 and 2009:2. Then last year the figures were revised sharply lower, especially for 2008:3, which showed that the recession got much worse before Lehman. NGDP fell 3% between 2008:2 and 2009:2. Now we have another revision, and the fall is nearly 4%! (minus 3.85% to be precise) What was already the worst AD collapse since 1938 just got even deeper.
What’s up with the BEA? It isn’t just that they are revising RGDP data from years ago (I suppose a new price index formula could explain that), but they are also sharply revising nominal GDP data from years ago. They are still getting new reports of nominal output! Even more bizarre, the nominal numbers are being revised downward by massive amounts, more than $100 billion. So they are getting new reports that nominal output for early 2009, which they still thought existed a year later in early 2010, did not in fact exist. I’m pretty sure that I would be horrified by seeing what goes on inside the BEA—I’d rather visit the Oscar Meyer factory in my hometown, to see how hot dogs are made. Employment numbers are probably our best “real” indicator.
So we now have a nice three year data set. NGDP fell nearly 4% from 2008:2 to 2009:2, and has risen at a tad over 4% a year for the next two years. We are up by only 4.1% in 3 years, that’s a little over 1% per year. In other words, per capita NGDP has barely risen in 3 years! To maintain full employment everyone would have had to go nearly three years without a pay rise. But with soaring minimum wage rates, that wasn’t too likely. I’m sure lots of people in government, health care, education, etc, got raises. I did (even with one year of no raise), as did my wife (a scientist.) So with almost no extra NGDP to go around (per capita), we essentially have a game of musical chairs. The lucky ones get pay increases, the other 9.2% are sitting on the floor.
Now I’ve got to revise my papers. I’ve been saying NGDP fell 8% below trend during the contraction, actually it was 9%. And we are 11% below trend over the three year period. Obviously we are never going all the way back, nor would I advocate that. But we are 5% below Bill Woolsey’s quite conservative 3% NGDP target, starting from mid-2008. A target most ultra-conservative inflation hawks would have grabbed in a heartbeat, if offer the chance in mid-2008.
There’s a bit of good news for those pushing the structural problems argument. Previously the real/nominal split during the recovery was estimated at 2.8%/3.9%. Now it’s estimated at 2.5%/4.1%. So we have a tad more stagflation that we thought, but still not very much. More worrisome is the split over the last two quarters, 0.85%/3.4%. That may reflect the effects of the oil shock, but we need to watch that carefully to see how severe the economy’s structural problems really are. I am a moderate on this issue, and believe we have some structural problems in the labor market, but that it’s mostly demand-side. The new figures haven’t led me to revise this view, but if they continue for several more quarters, I will definitely revise this view. Although I won’t revise my monetary policy recommendations, which don’t depend at all on real variables.)