Here, here!

I wrote the following post in 2014, back when you didn't have to subscribe to read the Financial Times. Found it again just now, and I'm posting the first half of it. The topic is relevant to the one I've been writing that isn't finished yet. Here you go:



I went back to that Gavyn Davies article to see if his two "here" links were working. Nope. And the link in the footnote worked, but required more commitment than I was willing to make. So there was nothing for me to do but read his article again.

Gavyn Davies on economic growth:

The long run growth rate, as identified in the Fulcrum study, is defined as the trend component of the growth rate. Economic cycles will fluctuate around this rate. But the trend component can also change through time.

That's well said. The business cycle is variations from a trend line: a little above, then a little below, then a little above again. (See? Gavyn Davies said it better.) But the trend line is not a "given". The trend line is just what you get if you take all the little variations and smooth them out. What's left then is the trend. And of course the trend can change.

Heck, that's the most interesting part: to see the changes in the trend.

You can take a jiggy line and figure a moving average and use that to smooth out all the jiggies and show the general trend. (That's the kind of thing I do for fun; you know.) But what that means is, the trend line emerges from the jiggy line. Making a trend line is just an attempt to get a better look at where the jiggies are taking us.

So it's a little silly to take that thought, turn it backwards, and say the trend line is a given and the jiggies will forever follow the path indicated by the trend. In my experience, economic data comes from the past. A look at a graph of that data is a look at the past. You look for trends in the past, and you look for changes in trends, and that's what it's all about. So where does "forever" come from?

Maybe it comes from people who are not very good at math.

Gavyn Davies:

The regression to the mean that Summers/Pritchett have identified is a reversion to the global average growth rate. But that growth rate may also change. The assumption that the mean growth rate is one of the great economic constants in advanced economies is simply wrong.

It's wrong to assume that the trend growth rate is a constant that does not change.