…but when I do I’ll at least tell you about it.
What all this also tells us is the folly of using growth from the recession trough as a measure of success: the worse you screw up the original response to the crisis, the better this measure looks!
And the bottom line remains the same: a weak recovery was only to be expected given the kind of crisis we experienced in the waning months of the Bush administration.
The second post essential expands the first point to Latvia. He explains:
As Reinhart-Rogoff say, rapid growth over a short period following a deep slump does not constitute a success story; by that measure, America was a tower of prosperity in the depths of the Great Depression. It’s much more informative to focus on levels, both of output and of unemployment, and compare them with the pre-crisis peak.
For evidence he points to Latvia’s GDP levels, which has apparently been considered a success.
What is a bubble? You certainly can’t know it’s a bubble by just looking at it. You need a model. (i) Write down a model that determines asset prices. (ii) Determine what the actual underlying payoffs are on each asset. (iii) Calculate each asset’s “fundamental,” which is the expected present value of these underlying payoffs, using the appropriate discount factors. (iv) The difference between the asset’s actual price and the fundamental is the bubble. Money, for example, is a pure bubble, as its fundamental is zero. There is a bubble component to government debt, due to the fact that it is used in financial transactions (just as money is used in retail transactions) and as collateral. Thus bubbles can be a good thing. We would not compare an economy with money to one without money and argue that the people in the monetary economy are “spending too much,” would we?
But the bubble component of housing prices after, say, 2000, does not appear to have been entirely a good thing, as it was built on false pretenses. Various kinds of deception resulted in housing prices – and prices of mortgage-related assets – that, by anyone’s measure, exceeded what was socially optimal. As a result, I think we can make the case that pre-2008 real GDP in the US was higher than it would have been otherwise. Further, the housing-market and mortgage-market boom could have masked underlying changes taking place in US labor markets – for example David Autor’s “hollowing out” phenomenon. One could argue that there was a cumulative effect in terms of the labor market adjustments needed, and that these adjustments took place during the recent recession, and are still taking place. See for example this paper by Jaimovich and Siu. That’s why all the long-term unemployed. So that’s not some confusion. People are talking about alternative ideas that have some legs, and may have quantitative significance. Why dismiss them?