Is a real economic recovery underway? If so, do President Bush’s tax cuts deserve credit? These questions have been raised by Paul Krugman and others.

When I was a young economist working in the forecasting section of the Federal Reserve Board, one of my most memorable experiences was when Governor Lyle Gramley sat down at our table in the staff cafeteria (the only time I ever saw a Governor sit down in the cafeteria rather than the executive dining room) to dispute our forecast for a tepid economic recovery.

“When a recovery comes, it really comes,” Governor Gramley said, sternly. “You don’t see 1 or 2 percent growth. You see much stronger growth.” He turned out to be right.

My instinct is that the third quarter growth rate of GDP of 7.2 percent is an instance of recovery coming on strongly. I would bet that the recovery is real.

Krugman writes,

unless we start to see serious job growth — by which I mean increases in payroll employment of more than 200,000 a month — consumer spending will eventually slide, and bring growth down with it.

I do not often disagree with Krugman on matters of pure economic analysis, but on this point I will voice dissent. Strong GDP growth generates income with or without job growth. In the latter case, what it produces is strong increases in profits, which in turn will fuel stock prices and investment. Economic slowdowns are not triggered by high profits.

I think it is a mis-statement to say that continued economic growth depends on job increases. I expect employment to rise in the months ahead. However, if job gains fail to materialize, I would regard that as a symptom rather than as a cause of a stalled recovery.

On the second question of whether the Bush tax cuts deserve credit, I would say, “No.” I think it is very unlikely that a reliable macroeconomic model would show a far different economic trajectory with and without the tax cuts. While I think that the President’s policies do not deserve a bad grade, I caution against making the economic attribution error of giving the President too much credit or blame for economic performance.
For Discussion. If economic growth remains high but employment growth is sluggish, would this imply a need for policies that stimulate demand or that deal with structural issues in the labor market?