U.S. Economic Boom in ‘60s Beat ‘Greatest’ in ‘80s
Has the recent business cycle expansion been the “greatest ever”? This may seem to many readers like flaying a dead horse, but I will once again devote this column to a critique of recent claims by Martin Anderson, former Reagan White House adviser, that the “Reagan Boom . . . was the greatest economic expansion the world has ever seen--in any country, at any time.”
I challenged that conclusion in my last column on Feb. 25, arguing in some detail that Anderson’s claims were misplaced. As might have been expected, Anderson complained about my column in a letter to the editor, charging that I had “never refuted (his) main point” and that I had perpetrated “more shoddy research and illogical reasoning in fewer words” than he had ever seen.
Excerpts of Anderson’s letter were published in this section March 18. Since space constraints prevented my being able to reply to his charges then and there, I promised that I would respond in my next column. Being a man of my word, I now offer my response.
Anderson complained vigorously in his letter, indulging in some gratuitous red-baiting while he was at it. But he both failed to respond to the arguments I made in my piece and tried to change the rules of the game in the process.
I argued in my original column that the comparisons he made in his original piece, in supporting his claims of “world records,” were misconceived in three important ways:
1. It makes little sense to compare an economy’s absolute volume of expansion in jobs and output, instead of their expansion relative to the size of the economy. If a 1% annual increase in employment in China resulted in as many as 5 million new jobs, I asked, would we argue that its economy was growing more robustly than the U.S. economy in which a 2.6% annual increase in 1986-87 generated “only” 2.8 million new jobs? Claims of greatness should focus, in other words, on growth relative to the previous size of the economy, not the absolute volume of the growth.
2. It seems similarly misguided to talk about the nominal value of output expansion, rather than its real value. And yet Anderson had offered as evidence of “greatness” the cumulative increase in nominal GNP, uncorrected for inflation. Conservatives had rightly ex pressed concern about rampant inflation in the late 1970s. Shouldn’t they therefore assess their own record of output expansion by correcting for inflation rather than claiming price-inflated nominal output growth as part of their achievement?
3. It is misleading, finally, to comment on the pace of expansion from the bottom of a recession without also taking into account the depth of that recession; real net investment grew by 50% from 1982 through 1989, for example, but it had previously declined by roughly half from 1979 to 1982 and was in fact lower in 1989 than it had been in 1979. Is this rapid expansion or limp recovery from a devastating recession? Anderson ignored these problems, earnestly repeating his claims about “GNP produced (and) jobs created” from the trough of the 1980-82 recession.
Anderson also suggested that we play by different rules than he had earlier followed. In his original piece, for example, he had claimed that the number of jobs created between 1982 and 1989 by itself “was a world record. Never before had so many jobs been created during a comparable time period.”
In direct response to that claim, I simply pointed to other periods and places with greater relative employment expansion. In his letter, Anderson argued that we must “apply the same multiple criteria to each” business cycle, ignoring his earlier advertisements for world records along single dimensions of performance. The problem with Anderson’s subsequent challenge, however, is that economists do not uniformly agree on the set of multiple criteria by which we should judge business cycles or periods of expansion; there is certainly no consensus that the four “normal criteria” he listed--GNP produced, jobs created, successive months of continuous growth and change in the value of the stock market--are either the most important or the only relevant standards.
Still, Anderson persevered, insisting that I play by his rules. He closed his letter: “By definition, one of America’s economic expansions has to be our greatest one; perhaps someday Professor Gordon will let us all know which one he thinks is the greatest.”
OK. Since I’m a sporting fellow, I’ll play the game even though I would continue to argue that comparisons of expansions alone, instead of business-cycle averages, can be highly misleading. Limiting myself to the U.S. economy in the post-World War II period, for which data is the most readily comparable, I choose the long expansion of the 1960s as uniformly more impressive than the long expansion of the 1980s, judging throughout by relative and not absolute rates of growth. (I ignore here Anderson’s criterion of stock market inflation, since stock market surges can just as easily indicate financial fragility--witness the late 1920s in the United States or the recent Tokyo stock market--as they can reflect sustainable economic strength.)
* Using standard National Bureau of Economic Research business-cycle dating, the 1960s expansion lasted from the first quarter of 1961 to the fourth quarter of 1969, a total of 36 quarters. From the fourth quarter of 1982 to the fourth quarter of 1989, the recent expansion had continued for 29 quarters; it still has seven quarters to go before it even ties the record. Will it make it before giving way to stagnation or recession? We’ll soon find out, but in any case, it was not yet, when Anderson wrote in January, 1990, the “longest expansion ever.”
* Real output growth in the 1960s expansion was 37.2% over its initial value, compared to 27.7% in the 1980s case.
* Employment growth was much closer, with 17.8% in the 1960s case and 17.2% in the 1980s expansion. But rapid employment growth by itself may be a sign of weakness, not strength, since it may reflect sluggish productivity growth . . . so let’s continue.
* Real hourly productivity increased by 22.3% in the 1960s expansion but by only 12.4% in Anderson’s “greatest ever.”
* What about real net fixed non-residential investment, a measure of an economy’s commitment to its future productive potential? It increased by 101.7% from 1961 to 1969 but by only 51.7% from 1982 to 1988 (the last year for which data is available).
Oh, by the way, wouldn’t it make sense to ask how people fared during these expansions--a dimension of economic performance that Anderson conveniently neglects? One might reasonably argue, after all, that it is people’s well-being that economic expansions are supposed to promote.
Real median family income grew by 29.4% from 1961 to 1969 but by only 9.8% from 1982 to 1988 (the latest year for which data is available). Real spendable hourly earnings for production and non-supervisory employees, a measure of the hourly take-home for the vast majority of wage and salary employees, rose by 9.6% from 1962 to 1969 but did not increase at all, remaining exactly the same, between 1982 and 1988 (the latest year for which data is available).
The expansion of the 1980s was so limp, indeed, that present growth was financed by borrowing from the future. Many write about the federal debt. But of even greater concern has been runaway private debt during the 1980s expansion. We can measure the private debt burden by comparing total private financial and nonfinancial debt--including debt owed by financial institutions, households, farms, nonfinancial corporations and nonfinancial noncorporations--with total gross product. By this measure, the private debt burden increased by 29% during the period of expansion from 1982 to 1988. By contrast, the private debt burden increased by only 15%--roughly half the increase in relative indebtedness--from 1962 to 1969.
“By definition,” Anderson concludes, “one of America’s economic expansions has to be our greatest one.” Sorry, Mr. Anderson, but it wasn’t the one you helped shepherd from the White House.