Kevin left this comment after my last post:
I will just add that if we asked someone to point out where reckless monetary policy led to a demand-side housing bubble, nobody looking at those last two graphs would pick the 2000s. Nobody. The entire public discussion of finance over the past 15 years has been a massive exercise in reasoning from a price change. It’s not even like there is a point to it but some people take it too far. There is simply nothing there besides reasoning from a price change.
NGDP growth at the peak in the 2000s barely even reached the average growth rate of post WW II, yet the description that is considered above a burden of proof is the one that sees this period as some sort of crazed bubble where debt and money were flowing out of control.
Marcus Nunes also made a good point:
Scott, I think there are several things wrong in this post!
You should reread your early Feb 09 post: GDP=Y+C+I+NX=Gross Deceptive Partitioning!
If we use that earlier post as a starting point, we’d begin by looking at NGDP instability. Then we’d ask why RGDP instability deviated from that level during certain periods, such as the 1970s. And almost by definition it would have to be due to non-procyclical prices, such as the oil shocks, or price controls, or perhaps AS shifting due to changes in expected inflation. All three occurred during the Great Inflation. In other words, the analysis of components was a sort of dead end in Marcus’s view, and he’s probably right.
Caroline Baum sent me a NYT story with “reasoning from a price change” implications. It is entitled “A Global Chill in Commodity Demand Hits America’s Heartland.” To its credit they do also mention the previously popular “tax cut” theory:
The 37 percent drop in gasoline prices since the summer of 2014 is the equivalent of a $100 billion tax cut, providing much-needed relief while wages remain stuck.
Certainly falling commodity prices have different effects on different sectors, but as for overall RGDP? That would be reasoning from a price change.
And finally, someone needs to tell Greg Mankiw that “objects in his rear view mirror may be closer than they appear”. (And for the first and last time in my life I’m one ahead of Krugman on a list.)
Yes, I know, it’s not textbook season.