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Great Graphic: GDP Per Capita Selected Comparison

Summary:

 

US population growth has been greater than other major centers that helps explain why GDP has risen faster.

GDP per capita has also growth faster than other high income regions.

The US recovery is weak relative to post-War recoveries but it has been faster than anticipated after a financial crisis and shows little evidence of secular stagnation.

This Great Graphic was used in a recent Bloomberg column by former Minneapolis Fed President Kocherlakota, and now a professor at the University of Rochester.

Kocherlakota was a dove when he was at the Fed and remains dovish. He is concerned that the US economic performance is, as he says, not what it seems. By this, he means it is weaker than the GDP figures suggest. He acknowledges the US has grown faster than the other high income economies. He dismisses it because the US population has also grown faster, but the participation rate has not.

He think two things follow from this assessment. First, that if the US economy is not comparatively stronger than it means that the Fed’s asset purchases are not more effective than in other countries. Kocherlakota thinks this means that Fed should be more cautious therefore about unconventional policies and their ability to substitute for conventional monetary tools. He does not specify an actionable course when the zero-bound has been reached.

Second, Kocherlakota argues that there is more that can be done to increase employment for the prime age cohort  (25-54 yrs). He does not offer specifics, but it seems that this is the role of fiscal policy, not monetary policy.

I am not persuaded by Kocherlakota’s arguments. Even if we were to accept as given that US growth has not exceeded Europe or Japan’s by very much, that does not mean that the Fed’s asset purchases were not more effective. Consider the bang for the buck. The Federal Reserve’s balance sheet was roughly 25% of GDP. The BOJ of Japan’s is more than three times larger proportionate to its GDP.  If the Fed achieved similar results as the BOJ, which Kocherlakota claims, with considerably less resources, that also speaks to effectiveness.

In addition, the fact that the Fed’s unconventional path began not months or quarters, but years before the BOJ or the ECB’s asset purchases is also meaningful. When the Federal Reserve began its asset purchases, interest rates were much higher. Moreover,  Kocherlakota may be mistaking the goal. The Federal Reserve did not call its asset purchases QE, but rather credit easing. It was not offered as a solution to low inflation. Both the ECB and the BOJ are buying assets ostensibly to lift inflation toward its respective targets.

 

Kocherlakota presents this chart of GDP per capita but then dismisses it because the US out performance is not as substantial as he wishes. Population grew faster in the US than in the other centers, and so did GDP per capita.There is now roughly a five percentage point gap between the US and eurozone GDP per capita growth over the eight years captured in the chart.  This is significant especially as it comes on top of the pre-existing gap in the US favor.

Japan’s performance is interesting for a different reason. Its GDP per capita fell further than the US during the crisis and recovered quicker. However, its improvement faltered, and the US has been able to overtake Japan in the last two years. Essentially what is happening in Japan is its economy is shrinking slightly slower than its population is falling.

The UK economy was hit as hard as Japan by the crisis, in terms of GDP per capita, and harder than the eurozone. It did not experience that double dip that the eurozone did and since the middle of 2013, GDP per capita growth has surpassed the eurozone’s. Depending the how much Brexit disrupts the economy in H2, its GDP per capita growth may surpass Japan’s this year.

GDP Per Capita

(see more for GDP Per Capita)

GDP Per Capita

Click to enlarge.

Kocherlakota’s argument that the US economic recovery is not so impressive is more compelling when looking not at international comparisons, but in the context of post-WWII US recoveries. Nevertheless, it is stronger than expected if one accepts historical work of Reinhart and Rogoff (This Time is Different). Looking at the chart, it is difficult to find support for the other big interpretative framework offered by Summer’s “secular stagnation” claim.

 

Full story here
Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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