Friday, June 04, 2010

Just the Facts

The above chart shows US GDP over a time period of well over a century on a log scale. That dramatic upturn on the far right represents well over a decade. I've removed the years from the bottom for purposes of posing a question. What year do you think this graph ends?

First, a little background. This chart comes from, one of the greatest collections of economic data on the internet. Not only is there a ton of information available, but it's very easy to request exactly what you need and get it in either a table format or a convenient chart. These charts are done in log form because that's the only way to get a sense of the growth rate over time. If you don't do a log chart, nearly every economic chart looks like a hockey stick. That's because the same growth rate over time (say, 3%) results in exponential growth. 3% growth when GDP is $1 billion produces way less growth than 3% growth when GDP is $1 trillion. Also, this chart uses "real GDP", which attempts to correct for the effects of inflation. The result, over long periods of time in the US, is what appears to be remarkably smooth growth. Now...back to the quiz...

If you're a fan of Reagan, you probably assume that dramatic upturn is thanks to Reagan's strong growth policies. You've got the dramatic downturn just before that, which must represent the stagnant 70's. And you've got the beginning of a collapse at the end. So naturally, this graph must end in the present day or some very recent year.

Yes, that would make sense if you live in the fact-free world of political ideology.

OK, so now here's the full chart, with years, for the years 1790-2005:

So when did that remarkable, unmatched period of economic growth occur in the US? That's right, it was the FDR years. The beginning of the remarkable upturn occurs precisely in 1933, the year FDR took office. The end occurs in 1945, as WWII begins winding down. During that decade-plus of near-socialism--with sky-high taxes, incredible government interference in the economy, and out-of-control government spending--the US experienced an average GDP growth of roughly 10%.

Yet if you listen to so many pundits and politicians today, they'll tell you low taxes are the key to prosperity, FDR's big government economic policies failed, and many other whoppers that simply don't stand up to scrutiny. The "Reagan boom" of the '80's doesn't even show up in the chart. The "big government is over" boom of can't even see it. The only decade-plus period of economic growth in American history that significantly stands out from any other period is the New Deal era.

One other interesting item...there's only one large country in the new millenium that has managed to achieve that magic combination of average annual growth of 10% or more over a period of a decade or more. That country, of course, is China. And I don't think anybody would dispute that China's economy runs with a heavy dose of government intervention.

Central planning without markets is a proven failure. But free markets without central planning have also proven to be a colossal failure over and over again. A healthy economy needs a strong dose of both.


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