Last Monday I attended Martin Wolf’s public lecture at LSE. Martin Wolf is a chief economist at the FT, and his lecture “In the long shadow of the Great Recession” was interesting and comprehensive.
Wolf argued that the Great Recession left a deep mark on the Western economies, with growth rates of most countries still way below their pre-crisis trends.The IMF’s predicted growth rates consistently overestimate the pace recovery, and show the harsh reality of the slow recovery. At the same time, he showed the divergence in experience of economic performance; Germany’s GDP is safely back to its pre-crisis levels, yet the Spanish and Italian economies are still lagging behind.
Addressing a room of mostly students and young professionals he concluded his talk by saying that hysteresis is powerful, and that “it is up to us to fix it”, which I thought was a nice touch.
The day after the lecture I was happy to see that he posted an article on the FT with the same title, and the same gist.
There is one problem with the evidence he used in his talk and the article, though. The argument (originally suggested by Jason Furman, chairman of the US Council of Economic Advisors and repeated by Wolf) is that the contribution of investment to labour growth productivity fell in the aftermath of the crisis, which was one of the reasons output has been taking a long time to jump back up. The evidence to support this claim is the graph below:
Comparing any variable only makes sense when you compare it over roughly the same period of time, or if you average both over a lengthy period of time. What seems to be happening in this graph is the comparison of the average of 3 post-crisis years with the average of 59 years.
That does not convince me at all. It could be that there has been a downward trend since 1948 and the average is higher because the growth rates were higher at the beginning of the period. It could also be that the growth rates fluctuate over time, and the past three years have been one of the dips in labour productivity attributable to investment, yet during other times of depressed economic activity the trend has been similar. In both of these scenarios, the graph is not good evidence that the Great Recession had a negative impact on the growth rate of labour productivity attributable to investment.
As much as I see and agree with the logic of the argument, the evidence presented to support it in the article is just weak.