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Roll Back the Clock. Repeat 3 Decades.

GDPxPresParty(Editorial) One gets the feeling when looking at officially published GDP data that we have come full circle – we both begin the series in 1929 and end it in 2012 with an episode of steep decline and multiple years of below-trend levels reported. Without getting into any sophisticated analysis or addressing correlation-causality issues, there are some obvious trends and associations worth mentioning that immediately jump out when visualizing the data (see chart). These should inform current economic policy debates, at least requiring some response.

The first thing noticeable when looking at real (inflation-adjusted) growth rates in GDP over time is that the further we get from WWII, the less growth in GDP we tend to observe (see white bar in chart indicating “all years” for each time period shown). Given the obvious reasons, the post-war period minus demobilization is shown to exclude the unusual circumstance of WWII, and the period 1981-2012 is shown because of the many economic policy changes that occurred around 1981 during President Ronald Reagan’s (R) first term. If there is anything to take away from this really simple analysis, it is that whatever economic policies were in place during the earlier years should be studied and reviewed as a guide to how we can solve our current economic problems.

Another take-away from the chart is the difference in economic performance between the years when Democrats and Republicans control the White House – higher in each time period when Democrats are in office than when Republicans are, although this association appears to be breaking down as we get closer to the present time.

So what narrative fits most easily to these trends and associations? First, the US had much more progressive tax structures, more regulation of business, and more unionization during the earlier periods. We were frankly just more progressive economically.

Second, the period with the slowest average economic growth rate is after 1981, so whatever “reforms” were implemented should be revisited, in order to determine what didn’t work. High on the list of suspected, failed policies are a less progressive tax rate and deregulation of the economy – especially the finance industry.

Third, the difference in performance between Democrats and Republicans shrinks as time goes on, especially so in the period coinciding with centrist “new” Democrats. As both Democratic presidents adopted support for many of Reagan’s policies during this period (1981-2012), it is worth looking at the marginal differences between traditional and new Democrats in order to identify why economic stewardship by traditional Democrats is superior.

One last thing to call attention to is the economic policies that are in place during the decade or so prior to each economic collapse (1929 and 2008). These both were decades of decidedly pro-market, anti-regulation, and low-tax policies. As beautiful as both laissez-faire politics and the calculus of neoclassical economics are, the facts on the ground need to drive current economic policy – not wishful, ivory-tower philosophy.

We’ve come full circle, entering into a sixth year of living with unnecessary scarcity – similar to the 1930s, although nowhere near as harsh. It’s time for practical people to throw ideology by the wayside and to support economic policies that work. Let’s reset the clock by removing changes that didn’t work out as planned, and by readopting tried-and-true policies from a more prosperous era.



One thought on “Roll Back the Clock. Repeat 3 Decades.

  1. Well said! People need to remember that employees aren’t just costs to be minimized, but also consumers that need to increase their consumption along with rising productivity.

    There was a brief period where income inequality was too low – the late 70s and early 80s. The response to the stagflation of that period was correct, IMO – supply-side economics. But the supply-side problem was gone by the mid-80’s. The continued low-tax, pro-business policies since then have created a severe demand-side problem. Same thing happened in the 1930s.

    Posted by Michael | May 7, 2013, 10:32 pm

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