Growth in the 1970s

Some people say economic growth slowed in the mid-1970s:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

- Scott Sumner

Some people say otherwise:

In a recent post I pointed out that during the 1970s we had normal (3.2%) growth...

- Scott Sumner

Couple years back, I quoted this from American Thinker:

Let us not forget that real GDP growth in 1984 was 7.3 percent; the next-highest value since was just 4.7 percent in 1999.

1984 really does stand out:

Graph #1: "Morning in America" (quarterly data)

To smooth the jiggy growth data (gray) on the graph below, I show a 9-year moving average in blue. It's a centered moving average: the last point shown for example, 2014, is the average for the years 2010 thru 2018. (And by the way, the two rightmost data points of the blue line show sharp uptrend because 2008 and 2009 drop out of the calculation.)

Graph #2: Based on Annual Values from FRED's GDPCA Series

Before 1970 or so, the blue line is roughly centered at the 4% level.

From the start of the 1970s to the early 2000s, the blue is centered between 2.00 and 4.00, so 3% or a little higher (but definitely below the 4% level).

The moving average for 2004 drops (because it includes the low growth of 2008); and by 2005 it drops below the 2% level.


Was growth in the 1970s slow as Scott Sumner says, or was it normal, as Scott Sumner says? Based on Graph #2, it appears that growth in the 1970s was slow compared to the 1960s and normal compared to the 1980s and '90s.

I want to make two points here. First: In 1983, James Hamilton opened his Oil and the Macroeconomy since World War II (PDF) with these thoughts:

The poor performance of the U.S. economy since 1973 is well documented:

1. The rate of growth of real GNP has fallen from an average of 4.0 percent during 1960-72 to 2.4 percent for 1973-81.
2. The 7.6 percent average inflation rate during 1973-81 was more than double the 3.1 percent realized for 1960-72.
3. The average unemployment rate over 1973-81 of 6.7 percent was higher than in any year between 1948 and 1972 with the single exception of the recession of 1958.

Since the time Hamilton's paper was published, one may suppose, people have accepted the view that growth was slow in the 1970s.

Second: I remember Paul Krugman talking about recessions:

A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation...

The second point explains the first: Krugman's observation explains Hamilton's. As Krugman says, the Federal Reserve dealt with high inflation (Hamilton's item #2) by raising interest rates until they created recession. Low output growth (Hamilton's #1) and high unemployment (#3) were consequences of the Fed action. "Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation".

It's not that the economy was slow in the 1970s. It's that there was inflation, and to fight inflation the Fed slowed things down. Not that the economy was "slow", but that it was "inflationary". To say that the economy was slow creates a false impression unless you explicitly note that it had to be slowed by policy because of inflation.

I looked at this before, actually. For "the 1960s" James Hamilton looked at a 13-year period (1960-1972) during which there were two recessions. For "the 1970s" he considered a nine-year period (1973-1981) during which there were three recessions. No wonder "the 70s" were slower than "the 60s": There were more recessions to slow things down.

What we don't know is whether the economy would have been slow in the 1970s if the Federal Reserve hadn't been slowing it.


If you live three blocks from the store and you're on your way to get cigarettes when you see a cop, right away you check your speed. You check your miles per hour. It is still "miles per hour", even if you are only going three blocks. That makes sense, right? In the same way, it makes sense to talk about "recessions per year" even though no one ever speaks of it that way: Three recessions in 9 years is a lot more than two in 13 years.

If two recessions in 13 years is normal, say, then three in 9 years will make your economy slow. So even if nobody else ever says this, I have to say the economy was slow in the 1970s because the Fed increased the frequency of recession.

But again, we do not know know whether the economy would have been slow in the 1970s if the Fed didn't slow it down to fight inflation.


That blue line on Graph #2 shows the economy much slower in the 1970s than the 1960s. The numbers are what they are, and that's what they show. And yet it is not right to say the economy was "slow" in the 1970s: The fact is that the Fed had to slow it down.

I've been thinking about how to compensate for changes in "recessions per year".

I want to see what growth might have looked like if the Fed hadn't been slowing things down. Hey, they had to slow things down because of the inflation. I'm not saying otherwise. I just want to see what growth would have looked like if they didn't slow things down. I want to be able to answer the question "Fed-induced recessions aside, how does growth in the 1970s compare to growth in the 1960s?"

In other words: Was the economy actually slow in the 1970s, or was it slow because the Fed made it slow? I want to look at that. I don't want to cheat by changing growth rates. But I want to imagine the 1970s with more years of growth and fewer years of recession.

I want to look at growth in the 1970s, with the recession frequency reduced to what it was in the '60s. Let me take Hamilton's work as an example: three recessions in 9 years versus two recessions in 13 years.

Three divided by 9 gives a recession frequency number of 33% for James Hamilton's 1970s. Two divided by 13 gives a recession frequency of 15.4% for the 1960s. That's half or less than half the recession frequency of the 1970s.

What would growth have looked like in the 1970s if the recession frequency was the same as the 1960s? Maybe growth would still have been less than in the 1960s. If so, we could rightly say growth slowed in the 1970s. Otherwise, we have to say growth was not slow in the 1970s except that it was slowed by the Federal Reserve.


It turns out that to do the math, I don't need to know the recession frequencies. I need to know the growth frequencies. For Hamilton's 1970s, not 33% but 67%. For his 1960s, not 15.4% but 84.6%. In the 1960s 84.6% of the years were growth years, but in the 1970s only 67% of the years were growth years. No wonder Hamilton saw a growth rate drop!

If I take a growth rate number for the 1970s and divide it by 67%, then multiply it by 84.6%, I get an estimate of what growth would have been in the 1970s if the Fed didn't have to be fighting inflation. If this number is less than the growth rate number for the 1960s, then it is reasonable to say that growth was slow in the 1970s.


At what point do we start to worry about growth being inadequate? I picked a number: 2% growth. I'm thinking that growth of 2% or less is worrisome, and growth above 2% is not. It's arbitrary, but I had to have a number to work with.

I added a column to the spreadsheet for "Growth above 2%". For each year, if growth was more than 2% I put a "1" in the column; if growth was 2% or less, I put a "0" there.

The blue line on Graph #2 is a 9-year Centered Moving Average. I made another new column in the spreadsheet, this time for a 9-Year Centered Moving Count, where "Count" is the count of years of growth above 2% for each 9-year period. This is my "growth frequency" data. Each data point in the Centered Moving Count corresponds to a point in the Centered Moving Average.

Graph #3: Count of Years of Growth Above 2%, for Each 9-Year Period

The overall shape of the red line on Graph #3 is similar to the overall shape of the blue on Graph #2, because we are looking at the same data (but in a different way).

The red line starts at 7, meaning that 7 of 9 years had growth above the 2% rate. It rises to 8 and then 9 out of 9 in the 1960s before falling into the 1970s.

The general tendencies of the count values, as they appear to me, are as follows:

• A count of 8 in the 1960s
• A count of 6 in the 1970s
• A count of 7 in the 1980s and '90s
• A count of 4 when the effects of the financial crisis and Great Recession are felt.

These values are impressions, not calculations, so don't put too much weight on em.

Using these generalized count values (dividing by 9, and rounding), I get the following estimates of growth frequency:

• 89% in the 1960s
• 67% in the 1970s
• 78% in the 1980s and 1990s
• 44% since 2005

Now I can take a "moving average" growth number from the 1970s, divide it by 67% to remove the 1970s growth frequency, and multiply the result by 89% to apply the growth frequency of the 1960s. In the '60s, remember, growth was less hobbled by Federal Reserve policy. This calculation gives me an estimate of "less hobbled" growth for the 1970s.

I'll do the same for the more recent data also, even though the Fed wasn't fighting double-digit inflation in later years. We still get estimates of growth that are not influenced by changes in "recessions per year".

We are taking "moving average" data and modifying it, so I refer to the new values as "Modified M.A." These new values are shown in red on the next graph. For comparison, I also show the original moving average values in blue, same as they were on Graph #2.

Graph #4: Moving Averages showing Actual (blue) and 1960s (red) Recession Growth Frequency

Red and blue are the same before the 1970s. They separate in 1970, with blue based on a growth frequency of 67% and red on 89% (the frequency from the 1960s). The size of the gap changes in 1980, with blue based on 78% and red on 89%. The gap widens in 2004, when the blue growth frequency number drops to 44%.

The blue line shows that growth was slow in the 1970s. But inflation-fighting by the Fed helped to make growth slow. The red line shows what growth might have been in the 1970s if the Fed wasn't busy creating recessions. Red in the 1970s appears to be centered at the 4% level, just as for the years before 1970. In other words, when recession creation by the Fed is discounted we find the same growth rate in the 1970s as in the 1960s.

After the recession of 1982, there wasn't another recession until 1990. The Fed was no longer busy creating recessions. Nevertheless, there is a gap between red and blue, based on the count of years with more than 2% growth. Adjusted growth since the 1980s was below 4%, as opposed to centered on 4% as it was in the 1960s and '70s.

Finally, around 2004, the gap gets wide again, because the count of years with "above 2%" growth went low. Here, as in the 1980s and '90s, it is not that there were more years of recession, but that growth was in fact slower.

The narrow gap between red and blue in the 1980s and 90s is likely due to the "Great Moderation" which was evidently a moderation of growth. (I don't know why economists think of it as "great".)

The wide gap of recent years is due to a definite slowing of the economy -- the sort of slowing that is said to have happened also in the 1970s. Well, it happened in recent years, definitely. But it didn't happen in the 1970s. The gap between red and blue in the 1970s is due to the increased frequency of recessions resulting from the anti-inflation policy of the Federal Reserve.

So if anyone tells you "The economy slowed in the 1970s," tell them it didn't! Tell them it was slow in the 1970s because the Fed was busy creating recessions one after the other. Growth was as good in the '70s as it was in the '60s. There just wasn't as much of it.