Tonight’s NewsHour debate between me and Robert Reich was about the role of Keynesian fiscal policy in the context of the today’s budget agreement. Reich was not supportive of the agreement because it precluded another stimulus package which, in his view, would create jobs. I was supportive because it was a start on budget consolidation path to restore sound fiscal policy which would reduce uncertainty over the exploding debt and thereby create investment and jobs. I think Jeffrey Brown gave us both a chance to make our case and provide historical evidence on what works and what doesn’t.
Such historical evidence will certainly play a role in the upcoming debates about the role of government in the economy. In this regard I see that Paul Krugman is on the attack again, this time about an article I wrote in the Wall Street Journal. Here is the paragraph from my article he criticizes following the pull out quote from Richard S. Grossman which he links to.
“With lessons learned from the century’s tougher decades, including the Great Depression of the ’30s and the Great Inflation of the ’70s, America entered a period of unprecedented economic stability and growth in the ’80s and ’90s. Not only was job growth amazingly strong—44 million jobs were created during those expansions—it was a more stable and sustained growth period than ever before in American history.”
So what’s the problem? No one can deny that the 1930s and the 1970s were tough decades for the economy. And job creation in the expansions of the 1980s and 1990s was amazing: There were two long expansions in the 1980s and 1990s: 1982-1990 and 1991-2001. In November 1982—the start of the1980s expansion—total non-farm payroll employment was 88,770 according to BLS historical statistics. In March 2001, the peak of the 1991-2001 expansion, it was 132,500. The difference in those 220 month was 43,730, about 44 million. There is no other 220 month period in the post war period where so many jobs were created. Note that this is not just the Reagan expansion; it includes all of the Clinton years.
And as the following graph illustrates the 1980s and 1990s were a period of “stable and sustained growth.” In fact because of the stable and sustained growth the period is called the Great Moderation which has been documented by many economists. Here is the Wikipedia entry which uses the same chart and contains many references. Unfortunately, the Great Moderation ended with the Great Recession and the non-existent recovery.
Paul Krugman also links to some total factor productivity plots to make his argument, but they are more supportive of my points. The charts show that productivity growth declined in the early 1970s (more evidence that the 1970s were one of the “tougher decades”). They also show that productivity growth picked up after the return to better macro and micro policies in the 1980s and 1990s. Of course, the pickup occurred with a lag most likely because of the slow diffusion of technology for the reasons emphasized by my colleague economic historian Paul David.