The Time Series Figures for the Most Basic of Business Cycle Macro Analyses: What Is to Be Explained and Accounted For

National Income and Components

Real GDP:

Real GDP per Worker:

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National Income Components as Shares of Potential GDP

Investment as a Share of Potential GDP:

Consumption as a Share of Potential GDP:

Gross Exports as a Share of Potential GDP:

Imports as a Share of Potential GDP:

Net Exports as a Share of Potential GDP:

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Monetary

Price Level:

Inflation Rate:

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Interest and Exchange Rates

Nominal Short-Term Safe Rate:

Long-Term Real Safe Rate:

**Long-Term Real Risky Rate:

Real Exchange Rate (Value of Foreign Goods/Currency):

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http://www.bradford-delong.com/2018/03/time-series-for-the-most-basic-of-business-cycle-macro-models-what-is-to-be-understood.html

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Notes on Figures

Real GDP

• Real GDP: labor productivity times employment
• The principal aspect of this graph is long-run growth: the American economy today is eight times the size of the economy of 1950
  • 2.5 times as many workers
  • 3.1 times output per worker
• The secondary aspect is the business cycle
• The tertiary aspect is speedup and slowdown in the growth trend

 

Real GDP per Worker

• Real GDP per worker (in 2009 dollars) was $45,000 per year in 1950 and is $115,000 today
• Note the productivity growth speedup of the mid-1990s
• And note the productivity growth collapse since 2000

 

Investment Spending as a Share of Potential GDP

• The major driver of the business cycle is fluctuating investment spending
• This is investment spending as a share of potential GDP
• In our simple macro model, I/Y☆
• These waves are the business cycles
• Note the anemic investment recovery of 2009-present

 

Personal Consumption Expenditures as a Share of Potential GDP

• In the language of our simple macro model, this is C/Y☆
• When Y is low relative to Y☆, C/☆ is low as well
• C/Y☆ was low in the business cycle troughs of 2009, 1992, 1982, 1975, 1970, 1960, etc.
• The medium-term rise in C/Y☆ as the U.S. becomes a save-and-invest-less country

 

Gross Exports

• Demand for U.S. exports has risen massively since 1950: from 5% to 13% of national income and product
• When the value of foreign currency/bonds is high, exports boom
• When the value of foreign currency/goods is low, exports are depressed

 

Gross Imports

• Imports have risen from 4% to 16% of national income and product since 1950
• “Globalization” and “hyperglobalization”
  • The coming of the container ship
  • The tripling of world oil prices in the 1970s a big moment
  • As is the great expansion of world trade with the coming of the internet
    • Value chains
    • The China shock

 

The Trade Balance

• Net exports are a balancing item: you have to add them to C+I+G to get total spending on domestically-produced goods
• The high interest rates of the 1980s that drove the value of foreign currency up led to a large negative swing in net exports
• So did the optimism about America of the dot-com boom, and the so-called “strong dollar policy”
• Most of all, however, the medium-term shift in the trade balance is due to the savings shortfall
  • Largely induced by large government deficits

 

Short-Term Safe Nominal Interest Rate: Treasury Bills

• The interest rate the Federal Reserve can nail: the short-term safe nominal interest rate
• Note the regular cycles as the Federal Reserve tries to “lean against the wind”
• Note the impact of the inflationary wave of the 1970s on the Treasury bill rate the Fed thought was appropriate
• Note the extended time at the zero lower bound in the 2010s

 

Long-Term Safe Real Interest Rate

• Subtract the current inflation rate and add on the term premium—the difference between the 3-mo. T-bill and the 10-yr. T-bond rate—and get what current and expected future Federal Reserve policy have on incentives for investment
• Note the:
  • Substantial tightening of the early 1970s
  • Loosening of the mid 1960s
  • Volcker disinflation of the early 1980s
  • The Greenspan preemption of the mid 1990s
  • The great easing of policy at the end of the 2000s

 

Long-Term Risky Real Interest Rate

• But the interest rate that actually matters for the determination of investment is the long-term real risky interest rate
• The safe rate plus the risk premium assigned by financial markets
• See the sharp tightenings coming from Federal Reserve policy and the financial system in:
  • the late 2000s,
  • the early 1980s, and
  • the early 1970s

 

Real Exchange Rate

• Dollar pegged to other currencies under the Bretton Woods system until the early 1970s
• Since then, three major dollar cycles
• Exports drop (and manufacturing hammered) when the value of foreign currency/goods falls
  • Reagan deficits
  • Internet/China
  • “Taper tantrum”
  • Trumpenomics

 

Price Level

• Headline and core
• Cumulative and compounded 7.5-fold inflation since 1950
  • Consumer prices today 2.5 times what they were in 1984
  • Consumer prices in 1950 1/3 what they were in 1984
• 2.5% per year

 

Inflation Rate

• Consumer Price Index
  • Not PCE…
• “Headline” and “core”
  • Current core a better forecast of future headline than current headline is
• Korean War
• Mid-50s to late 60s
• The 70s inflation
• “Opportunistic” disinflation
• The era of the zero lower bound