Claims

Factual · Economics and markets

“Two thirds of the time, it is one standard deviation, +/- 2.5%, from trend; that is incredibly stable.”

Jeremy Grantham, GMO co-founder, keynote speaker · 3 December 2012 · Long-Term Investing: An Optimal Strategy (Grantham keynote address) (Columbia Center on Governance & Sustainability)

US GDP grew about 3.4% a year for 100 years to about 1985, and two thirds of the time stayed within one standard deviation (+/-2.5%) of trend.

Unresolvable The public record could not settle it.

What would count as true or false

Test the claim against long-run US real GDP series covering about 1885–1985. It has two parts: (a) trend growth was about 3.4% a year over roughly 100 years ending around 1985; (b) about two-thirds of annual observations were within about ±2.5 percentage points of trend, i.e. one standard deviation of roughly 2.5%. TRUE: the trend rate is about 3.2–3.6% and the share of years within about ±2.5% of trend is roughly 60–75%, consistent with a standard deviation of about 2.5%. MOSTLY TRUE: both parts hold broadly, with a small slip, such as a trend of 3.0–3.8%, a standard deviation of about 2–3%, or end and start dates a few years off. MIXED: one part holds and the other is clearly off, e.g. the trend rate is right but deviations are much larger (standard deviation of 4% or more). MOSTLY FALSE: the trend is roughly right but the stability claim is badly overstated, e.g. many large departures such as the Depression and the war years make the within-band share well under half. FALSE: both the trend rate (outside about 2.5–4.3%) and the stability figure are clearly contradicted by the data.

Evidence

1. The Slowest Potential Output Growth in U. S. History: Measurement and Interpretation Federal Reserve Bank of San Francisco (CSIP Symposium paper by Robert J. Gordon, Northwestern University and NBER) · 14 November 2008

   “Potential real GDP has experienced an average annual growth rate since 1875 of 3.4 percent, and in many long periods of U. S. history in excess of 3.7 percent.”

2. Changes in Business Cycles: Evidence and Explanations Journal of Economic Perspectives (Christina D. Romer) · April 1999

   “Based on these four indicators, it appears that the volatility of the U.S. macroeconomy has declined 15 to 20 percent between the pre-1916 and the post-1948 eras.”

3. Changes in Business Cycles: Evidence and Explanations Journal of Economic Perspectives (Christina D. Romer) · April 1999

   “There is simply no denying that all hell broke loose in the American economy between 1920 and 1940.”

4. Measuring Worth MeasuringWorth · 1 April 2018

   “These series are linked backward to data from 1790 to 1929 constructed by Louis Johnston and Samuel H Williamson.”

5. The Slowest Potential Output Growth in U. S. History: Measurement and Interpretation Federal Reserve Bank of San Francisco (CSIP Symposium paper by Robert J. Gordon, Northwestern University and NBER) · 14 November 2008

   “Potential real GDP has experienced an average annual growth rate since 1875 of 3.4 percent, and in many long periods of U. S. history in excess of 3.7 percent.”

6. Changes in Business Cycles: Evidence and Explanations Journal of Economic Perspectives (author: Christina D. Romer) · 1999

   “The postwar era has not been, on average, dramatically more stable than the prewar era.”

7. [PDF] The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908 Christina D. Romer (University of California, Berkeley, and NBER); reprint PDF

   “The standard deviation of deviations from trend is 27 percent smaller for the new estimates than for the traditional series.”

8. [PDF] The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908 Christina D. Romer (University of California, Berkeley, and NBER); reprint PDF

   “This suggests that business cycles in the pre-Depression era are much less severe than the traditional GNP estimates for the prewar era have led us to believe.”

9. [PDF] The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908 Christina D. Romer (University of California, Berkeley, and NBER); reprint PDF

   “As a result, it is likely that the two Kuznets product-side series for 1869-1918 exaggerate the size of short-term fluctuations.”

Reasoning

Part (a) of the claim is backed by Gordon's estimate that potential real GDP grew about 3.4% a year on average since 1875 [E1, E5]. That window starts earlier and runs later than the claim's, but the trend rate matches. No evidence item gives the standard deviation of annual deviations from trend for about 1885–1985, or the share of years within ±2.5%. Romer's papers say the interwar years were highly volatile [E3] and that traditional prewar series exaggerate fluctuations [E9–E11], but they give no within-band share, so the stability part (b) cannot be settled from the evidence given.

Cite this claim

Jeremy Grantham, “US GDP grew about 3.4% a year for 100 years to about 1985, and two thirds of the time stayed within one standard deviation (+/-2.5%) of trend.” (said 3 December 2012). Verdict: unresolvable. Reliability API, claim c_e6322dfae35c, method 0.1.0+28da144b. https://epistacklabs.com/claims/c_e6322dfae35c