Brad DeLong has this habit where he makes it look as if he’s walked through several different strands of evidence, and they all come down squarely on the position he agreed with at the start of his investigation–even though some of the evidence obviously cuts the other way. It’s like we’re arguing over whether the Beatles ever released goofy songs, and he says, “I have considered John, Paul, George, and Ringo, and see no reason to support your wild accusation.”
Case in point: In his most recent post, DeLong is baffled that the Fed is still gung-ho about tapering later this year. Here’s DeLong, who first posts this chart and then comments:
There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007. [Bold added.]
Now I could quibble with all of those “indicators,” incidentally, because according to DeLong’s own framework, we’re well below potential GDP. So the fact that, say, wages aren’t rising rapidly, doesn’t mean that potential GDP is growing as before; even if potential GDP growth had sharply decelerated in 2008, the “real GDP” line could still be well below it, meaning you would see the weak pressure on wages that we are currently seeing. (Again, I’m doing this whole post within DeLong’s framework, just to show he’s making a non sequitur even on his own terms.)
But the most egregious claim above is that there’s nothing “in the level of investment…to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.”
Oh really? Here’s the official government statistics showing gross private domestic investment as a percentage of potential GDP. To keep potential GDP chugging along at its previous pace, you’d think GPDI should stay about the same percentage as it was from 2005-2007. But this is what actually happened:
Incidentally, I’m not purposely loading the deck against DeLong by only including private domestic investment; FRED doesn’t seem to have a single series adding government and private investment spending. But, I hardly think DeLong is able to claim that the above chart is more than offset by the huge surge in government investment spending (at federal, state, and local levels) from 2008 – present, what with the Republicans’ vicious austerity and all.
So not only are the Austrians (and Larry Summers in the occasional op ed) the only ones who think the composition of investment spending is important for sustainable growth, but apparently we’re the only ones who think going from 23% down to 15% of total potential devoted to investment, might slow down the growth of potential output.
UPDATE: In light of DeLong’s further commentary on this topic, I now think he didn’t mean that the rate of growth of potential GDP is not materially lower today, than in 2007. (It’s about 25% lower, according to the CBO estimate.) Rather, DeLong was saying that the (slower) growth in potential GDP since 2007, has not rendered its current level materially lower than people would have believed, back in 2007.
This is still very wrong, in my view. According to the CBO’s figures–which I believe are the source of the graph DeLong himself provided in his post above–the 2q2013 level of potential GDP is about 3.6% lower than it would have been, had potential GDP grown at the same rate from 4q2007 onward, as it did from 4q2006 through 4q2007. I imagine if, say, employment today were 3.6% lower than it would be in the absence of the sequester, that DeLong would not dismiss it as an irrelevant difference.
All of the above discussion can be seen in its sarcastic and puerile detail in the comments of this Daniel Kuehn post.