The Stories We Tell

The field of economics is a set of stories that we tell to better understand the economy. I thought of this when reading a new post by Matthew Klein:

If I had to pick one chart to tell the story of the U.S. economy since the end of WWII, it would be this:

Indeed Klein views the post-2006 slowdown in RGDP per capita as being so important that his Substack is entitled ‘The Overshoot”, an indication that we need to work on reversing the recent undershoot.

Of course, literary theorists know that stories can have many interpretations. What is Kafka’s Metamorphosis actually about?

If I were to tell a story about this a graph, the year 2006 would be of no importance at all.I would begin my story by focusing on productivity, not output per capita. Doesn’t real GDP per capita measure productivity? No, it does not.

So here’s my story. Between 1900 and 1973, America’s engineers and inventors made extraordinary strides that completely transformed a wide range of our industries. Here’s a 1903 airplane above a 1968 airplane:

I won’t bother showing you a 2021 airplane, as it looks similar to a 1968 airplane. Its interior electronics and engines are better, but the percentage gain is tiny compared to the gains during 1903-1968. Great strides were made in many other industries as well, including autos, home appliances, lighting, and infrastructure such as indoor plumbing. Life expectancy soared much higher.

After 1973, America’s engineers and inventors made extraordinary gains in one industry—computers. Productivity growth slowed sharply, with one exception. There was an upward blip in productivity growth during 1995-2004, which might have been real or might reflect a mismeasurement of the impact of PCs on the US economy. It’s a “matter of opinion”.In any case, that brief surge ended in 2004.

So if 1973 was the turning point when productivity growth slowed sharply, why does Klein’s graph make it look like 2006 was the turning point? What’s my “story”?

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