We’re in for a lot of pluck

March 16, 2021

By Paul Krugman

Opinion Columnist

If private-sector economists are anywhere near right, the U.S. economy is about to experience a spectacular boom. Economists surveyed by Bloomberg expect 5.5 percent growth this year; those surveyed by The Wall Street Journal expect almost 6 percent; Goldman Sachs expects 8 percent.

We haven't seen anything like this since the Morning in America boom of 1983-1984, a boom that lives on in conservative legend as proof of the magical power of tax cuts, even though every subsequent promise of a tax-cut miracle has failed.

But Ronald Reagan's boom wasn't all it was cracked up to be, and the same will to some extent be true of President Biden's. Rapid short-term growth will be a partial vindication of Keynesian economics, the notion that government spending can boost a depressed economy. But this kind of growth is only possible when the economy starts out way down, and the bigger test is what happens later.

To understand why forecasters are so optimistic, it helps to know about one of Milton Friedman's lesser-known analyses: his "plucking" model of the business cycle (a model that was somewhat at odds with his other work, but that's another story.)

Friedman suggested that we think of the economy's potential growth path — the maximum amount it could produce — as a tilted board, and its actual path as a wire string attached to that board. When the economy experiences a recession, it's as if someone pulled the string away from the board; when the recession ends, it's as if the string has been released, and springs back to the board.

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Ordinarily, the speed at which the plucked string springs back — the speed of the recovery — depends on how far it was pulled back. So you expect fast growth after a deep recession, which is what happened under Reagan — the double-dip recession of 1979-82 left the economy deeply depressed — and seems set to happen now.

This story doesn't always work. Recovery from the 2008 financial crisis was sluggish, partly because of an overhang of excess debt, partly because Republicans in Congress slowed the recovery with destructive fiscal austerity. But this time Democrats have pushed through a very aggressive stimulus, and in combination with the fading pandemic this suggests that we're in for a lot of pluck.

But then what? Springing back from a recession is one thing; achieving longer-run prosperity is something quite different. That is, what we really want to know is how things look after the plucking is over.

By that measure, the Reagan experience doesn't look that great. The recession — the downward pluck that made a couple of years of rapid growth possible — began in 1979. How did performance over the next decade look, and how did it compare with the previous decade (which also, as it happens, began with a recession)? Because income inequality surged, it depended on where you sat in the income distribution:

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Morning for some AmericansT. Piketty, E. Saez, and G. Zucman

For the bottom half of the U.S. population, the '80s were pretty bad: income stagnated or even fell a bit. For the middle class, they were ordinary: incomes grew at about the same rate as they had the previous decade. But for the affluent, and above all for the 1 percent, it was a great time. Which, of course, helps explain why the legend of Reaganomics continues to be promoted by right-wing propagandists.

Will Bidenomics do better? The American Rescue Plan is startlingly favorable to Americans with lower incomes. But a lot depends on whether key elements like the child cash allowance and enhanced health care subsidies become permanent, and on whether this big bill is followed by another big bill — this time one that invests in the future.

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Quick Hits

All about plucking, and why it's somewhat inconsistent with Friedman's other work.

Brookings has a sort of plucking picture of what the Biden package will do, basically getting us back to that board.

Mitch McConnell admits that a boom is coming, but says Biden has nothing to do with it.

Some Republicans are predicting runaway inflation, because of course they are.

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