Simple and obvious

Back in the 1960s, in a car magazine I was reading, somebody distinguished between "quick" and "fast" in regard to drag racing. I remember, because I never thought about it before, and the guy opened my eyes.

As I recall, "quick" refers to the time it takes to travel the quarter mile, and "fast" to the top speed.


In Growth in the 1970s I said

Growth was as good in the '70s as it was in the '60s. There just wasn't as much of it.

The statement brings up a difference comparable to the difference between "quick" and "fast" in drag racing: A difference that is simple and obvious once you are aware of it. But if you're not aware of it, finding out can be an eye-opener.

Economic growth almost always varies from year to year; from day to day, even. But apart from releases of the latest information, growth is almost always reported as a long-term trend. Such reporting provides useful information, but it also hides useful information: Sometimes growth is vigorous; sometimes not. Sometimes it isn't growth at all, but recession -- and sometimes recessions occur a decade apart, but sometimes only a year apart.

Sometimes, these differences are naturally occurring. Sometimes they are created by policy. Sometimes, we don't know they were created by policy, or maybe we pretend not to know.

The long-term trend hides the differences between rapid growth punctuated by frequent recessions, and slower growth interrupted less often by recessions (or by less severe recessions). Even if the trend rate of growth is the same either way, economic conditions must certainly be different in those different scenarios. By ignoring the differences, we can deceive ourselves and each other.

This graph shows recessions in the U.S. since 1854:

Graph #1: Recessions since 1854

The gray bars indicate recessions. The white spaces between the gray bars show times of growth. There is much more gray on the left half of this graph than the right half. There is a lot more white space after the 1930s -- and then more yet after 1960, except for the cluster of recessions in the 1970s and early '80s, during a time called "the Great Inflation".

Consider just the 58 years since 1960:

Graph #2: Recessions since 1960

In the first half , the 29 years from 1960 to 1989 there are five recessions. In the latter half, the 29 years from 1989 to 2018, there are three.

A time of frequent recessions is likely to be a time of relatively low trend growth, simply because growth numbers are low (or even negative) in recessions. Low numbers and negatives drag the average down.

So you might look at the graph and say that the 1970s was a time of low growth. A general view might even develop, which says that growth in the 1970s was slow. It could happen.

But the economic conditions of the time were, in a word, inflationary. The main concern of policymakers and econ news articles, in the 1970s, was inflation. Not slow growth.

Inflation is often associated with a "hot" or "overheated" economy, one with too much aggregate demand. As Wikipedia puts it:

Overheating of an economy occurs when its productive capacity is unable to keep pace with growing aggregate demand.

The economy is not likely to be "hot" and "slow" at the same time. And we know there was inflation in the 1970s. This should lead us to question the view that growth in the 1970s was slow. Come to think of it, it should also lead us to seek alternatives to the view that overheating occurs when productive capacity cannot keep pace with growing aggregate demand. But that's a different story.

We lose information when we think in terms of trend growth. This is true even if we figure separate trends for separate decades, because the decade with more recessions is likely to have slower trend growth. Growth-phase growth may be as good (or better) in the slower decade, while recession-phase growth brings trend growth down.

What makes this difference significant is that it fails to consider that the recessions may have been created on purpose by policy as a way to fight inflation. It fails to consider the view that the economy was hot rather than slow, and that the problem might really have been inflation, not slow growth.

How can you solve an economic problem if you don't even know whether the problem is what you think it is, or the opposite of what you think?


Forgive me if I dwell on this.

If you want to say the US economy was slow in the 1970s, okay, fine, it was slow in the 1970s. But it was policy that slowed things down, because of the inflation problem in those years. So if you are talking about that slow economy, you are talking about a result of policy and you are treating the result of policy as the problem.

You cannot squarely address the problem of slow growth in the 1970s unless you treat it as a result of the policy response to inflation. I'm not recommending this, but in the case of the 1970s the problem of slow growth could have been solved by ignoring the inflation problem.

If this opened your eyes the first time I said it, but it's boring you now, then I have succeeded: The concept has become simple and obvious.

Consider now debt.

We take on debt by borrowing money. The cost of doing so is the interest we pay. So you might think that when interest rates are low, the cost of debt is low. But this ignores the size of the total accumulation of debt on which we pay interest. It is as if you are looking at the economy's trend growth rate, and forgetting about recession frequency -- or looking at the dragster's rate of speed and forgetting about elapsed time.