The Business-Cycle History of the Past Thirty Years Through the Lens of Aggregate Demand: Four Components of Multiplier-Driving Spending
As Paul Krugman says at every opportunity, if you knew nothing of macro after 1975—if you were just armed with sticky-price IS-LM—you would have done an excellent job at understanding the U.S. economy since 2008. I want to point out that this holds true for more than the past ten years: this holds true for the past thirty years as well:
Business Investment, Residential Construction, Government Purchases, Exports
All as Shares of Nominal Potential GDP
All as Percentage-Point Deviations from 2007QI Values...
Generating a High-Investment High-Productivity Growth Economy: The Clinton-Deficit-Reduction Program
A 2.3%-point cut in government purchases as a share of potential GDP plus an equal cut in tax revenues driving a 3.3%-point increase in business investment spending and a 1.0%-point increase in residential construction as shares of potential output.
The Collapse of the Dot-Com Boom
A 3.5%-point fall in business investment spending plus a 2%-point fall in gross exports as shares of potential output.
The Housing Bubble-Led Recovery
Rises in residential construction, business investment, and exports of 2.0%-points, 1.3%-points, and 1%-point, respectively, of potential output, driving the American economy closer to full employment.
Managing the Collapse of the Housing Bubble
Housing sits down: from its peak to late 2007, residential investment falls by 3.0%-points of potential output. Exports and business investment stand up, by 2.5%-points and 1.0%-point of potential output, respectively. The economy remains near full employment.
The Financial Crisis and the Great Recession
Crash! Residential construction falls by a further 1.2%-points, business investment spending falls by 4.5%-points, exports fall by 2.5%-points of potential output. Offsetting this is the Recovery Act's stimulus of 1%-point of potential output.
The 1%-point of potential output stimulus to government purchases of the Recovery Act is taken away by the states and as Obama turns himself into Herbert Hoover. the end of the financial crisis sees business investment and exports both recovery by 3%-points of potential outpuot each.
Drift and Austerity
Exports plateau. A 2.5%-points of national product further recovery in business investment is fully offset by state-level (and some federal) fiscal austerity. The failure of the Obama administration to concern itself with housing finance leaves an extremely feeble residential construction sector.
Declaring the New Normal to Be Victory
The Federal Reserve, the President, and the Congress conclude taht this is as good as it gets, and stay the course—until the end of 2017.
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