The Normal and the Pathological: Normal Economies Edition

Brief thought as I begin to read through books that purport to explain how national income accounts work: Everyone’s favorite conservative economic blogger, Harvard’s N. Gregory Mankiw, is worried that the government may use the crisis as an excuse to permanently increase government expenditures as a percentage of GDP. He notes that during the Great Depression and WWII, government expenditures logically increased dramatically. But then they failed to drop off:

From Mankiw's Textbook

The graph and proposal are interesting. For example, if the Democrats manage to get some sort of National Health Care system in place, we rate to see a dramatic increase in governemtn expenditures as percent of GDP, and this crisis could be a great excuse to get it passed (lots of involuntarily unemployed people, need the government to spend lots of money anyway, the insurance industry is fubared, etc.). Of course, Mankiw and I disagree about whether or not this would be a good thing, but that’s slightly beside the point. It’s worth noting that in most European countries, government is a much higher portion of GDP (some not great data here).

What interests me most in Mankiw’s analysis is this line:

Here is one question reporters should focus on when evaluating the proposed plan: Five or ten years from now, when the economy is presumably at some normal level of employment and growth, what will the federal budget look like, as evaluated by the budget deficit and tax revenue as a share of GDP?

I don’t know why I hadn’t made this connection before (or maybe I just don’t remember making it), but what makes an economy “normal”? There is an extensive and interesting literature around the idea of “normal” and “pathological” (e.g. Durkheim, Canguilhem, Foucault) and how constructed and recent those concepts are. How do we make a “normal” economy? What does that mean? What are the politics of normality when it comes to economies? How does this relate to questions such as “are we in a recession?” etc.?

EDIT: The Economist’s Free Exchange blog has some insightful as usual commentary on Mankiw here.

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1 Comment

  1. K.I.M.

     /  January 2, 2009

    Normal? It almost appears that Mankiw’s concept of normal shows a latent desire for a communist economic model. Only under a highly regulated economic model would you have static employment and growth rates, even if they were relatively low.

    Normal in capitalism is a continuous cycle of high and low unemployment rates. So perhaps this concept of normal growth means steadily creeping back up from rock bottom. Hello Rock, Meet Bottom.

    Creative destruction drives the economy forward and we have failed to be creative. Recently businessweek noted that innovation is no longer the underlying theme in the business world, transformation is. The problem with transformation; however, it takes existing production and changes the way it’s delivered to the masses. It’s harder to squeeze incremental value, and thus overall growth under this theme. Simply put, we’re no longer growing potatoes, we’re simply turning the potatoes into fries.