Posted by: Doug Henwood | October 23, 2018

Hits to GDP

The hysterical (in the funny sense) report on socialism that the Council of Economic Advisers put out this morning contains this gem of simulation:

It may well be that American socialists are envisioning moving our policies to align with those of the Nordic countries in the 1970s, when their policies were more in line with economists’ traditional definition of socialism. We estimate that if the United States were to adopt these policies, its real GDP would decline by at least 19 percent in the long run, or about $11,000 per year for the average person.

Sounds dire—but even if true, and there’s no reason to believe it is—that would be smaller hit than the 2008 financial crisis was, no simulation about it. As the graph below shows, over the long term, actual GDP wandered around its trendline, rising above in booms (1990, 2000) and falling below in busts (1975, 1982). (The trendline assumes constant growth at the average over the period, 3.2% a year.) But the 2008 financial crisis and its sequelae have driven actual GDP well below its previous trend. Had real per capita GDP continued to grow at its 1970–2007 trend rate after the financial crisis, it would be $12,316 higher than it is now.

So a financial crisis is at least 12% worse than Nordic social democracy, without all the benefits.

GDP per cap actual & trend


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