I love this video, but that is because I agree so much with Leamer.
One thing I would point out about his charts is that he uses trend lines and implies that mean reversion is the norm. That is, for most of the postwar period, if you had a recession that took GDP below trend, you would then have above-trend growth. An alternative hypothesis is that real GDP follows a random walk with drift. That would mean that it always tends to grow at 3 percent, regardless of its recent behavior. The last three recession seem to follow such a model.
In the late 1980s, some folks, notably Charles Nelson and Charles Plosser, argued strenuously against mean reversion and in favor of the random walk with drift. Note that this is back when Leamer describes output and employment as mean-reverting. I wonder if what happens as data get revised over long periods of time is that random walks get turned into mean-reverting trends.
Note Tyler Cowen’s comment on the latest employment report:
we are recovering OK from the AD crisis, but the structural problems in the labor market are getting worse. It’s becoming increasingly clear those structural problems were there all along and also that they are a big part of the real story. On the AD side, mean-reversion really is taking hold, as it should and as is predicted by most of the best neo-Keynesian models.
Not sure what distinction you hope to draw between mean reversion and a random walk with drift. If they both imply 3% growth interrupted by occasional dips, as they seem to, they just seem like alternate names for the same phenomenon. The bigger problem is that both seem to imply random dips, ie there’s no real reason for such correlation, which is patently false.
I can see why you like Leamer, as he’s putting forward a PSST model where the collapse of manufacturing is driving the recent stasis. I would argue the complement, that it is the lack of growth in online jobs that is the real killer. Industries are always dying, it’s just rare that new ones don’t come along and create new jobs. The fundamental problem is a lack of micropayments, so that a bunch of online activity is held back because it cannot be traded for. Once micropayments start another tech boom, you will realize I was right. 🙂
Might another angle on “mean reversion” be: While prices are sticky, they aren’t completely so.
It seems it is very difficult to answer this question econometrically, because we only have one GDP series and it is not very long. (There’s also the issue of tests having low power to reject the unit root null hypothesis.) Here is a blog post about it (he does not like unit roots).
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/03/the-unitroot-zombie-dead-but-still-wreaking-havoc.html