Year %Change in GNP President 1930 - 9.4% Hoover 1931 - 8.5 Hoover 1932 -13.4 Hoover 1933 - 2.1 Hoover/Roosevelt 1934 + 7.7 Roosevelt 1935 + 8.1 Roosevelt 1936 +14.1 Roosevelt 1937 + 5.0 Roosevelt 1938 - 4.5 Roosevelt 1939 + 7.9 Roosevelt
Roosevelt's average growth of 5.2 percent during the Great Depression is significantly higher than Reagan's 3.7 percent growth during the Seven Fat Years! Does that mean that people had it better during the Great Depression? Of course not. What this exercise shows is that recessions and depressions matter. Often, growth is simply a return to normal, not an objective measure of economic health. So by conveniently omitting a recession here, or including one there, you can prove just about anything you want to prove.
To get around this problem, economists use an entirely different
yardstick to assess growth over the years. They use potential growth, as
opposed to the actual growth depicted on these charts. Although some people
turn skeptical when economists start using terms like "potential"
and "theoretical," the principle involved here is actually quite
simple, and both conservative and liberal economists agree upon it.
Potential productivity reflects our nation's productive capacity; actual productivity reflects how much of that capacity is actually in use. For example, a factory may have the potential to turn out 3,000 cars a month. During a recession, however, its actual productivity may only be 1,500 cars a month. Actual growth would occur if the factory returned to a full capacity of 3,000 cars; potential growth would occur if yet another factory were built.
During a recession, actual productivity drops as millions of workers are laid off and empty factories sit idle. But all the potential productivity is still there. In fact, potential productivity climbs even through recessions. Why? Because the population -- and with it, the workforce -- is always growing; science and productive technology are always advancing (and, in fact, are often accelerated during a recession as employers look for ways to make production more efficient); and factory planning and building, which take years, often continue through recessions by sheer momentum. As a result, potential productivity climbs slowly but surely, while actual productivity swings wildly, sometimes close to the potential, sometimes far below it.
In a recovery, then, actual productivity climbs closer to its potential, as millions of laid-off workers return to empty factories. This gives the appearance of growth. But what happens when all the workers have returned? Then any further growth will have to involve potential growth. Supply-siders claimed they would increase potential growth as well; tax cuts would allow greater investments in factories, machinery and jobs, thus increasing productive capacity, not just utilization.
Economists calculate potential growth by entering actual growth into an equation that holds the unemployment rate constant at 6 percent. And the big surprise is that potential growth has remained virtually the same -- about 2.5 percent -- under four presidents: Ford, Carter, Reagan and Bush.
The implication of this statistic is that much of the "Reagan recovery" was actually an ordinary event. Unemployment during the recession had hit a postwar record of 10 percent near the end of 1982, so there was an unusually large number of people waiting to return to work. But as for the creation of new factories and better productive technology, the Reagan era grew no more quickly than Jimmy Carter's.
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