The National Bureau of Economic Research has declared that the Great Recession ended in June 2009. At first glance, some may see the end of the recession as vindication of the White House’s stimulus and its other aggressive fiscal-policy initiatives. But a closer look at the numbers suggests the president and his economic advisers may have significantly misdiagnosed the nature of the recession.
President Obama frequently invokes the specter of the Great Depression in speeches to the public, knowing full well that the reference conjures up images of mass unemployment, breadlines, and despair. In one of his more recent high-profile appearances, the president forcefully claimed that his administration’s policies staved off a second Great Depression.
True enough, the Great Recession lasted 18 months. That’s the longest recessionary period since 1929. But this fact reveals far less than the president implies. The Great Depression was a decade-long economic roller coaster. The economy fell into a 43-month abyss, grew for a while starting in 1933, and then plummeted again into recession in 1937. By some estimates, unemployment peaked at one third of the national labor force.
The Great Recession isn’t anywhere close to those numbers. While the president has accurately called the absolute numbers of jobs lost “unprecedented,” the economy is so much larger now that the official unemployment rate has barely nudged up to the 10 percent mark. In 1929, the economy generated about $977 billion in goods and services (in 2005 dollars). In 2009, in the midst of the Great Recession, the economy generated $12.9 trillion (down from $13.2 trillion in 2008).
Indeed, the Great Recession is significant only when compared with the relatively mild recessions of the recent past. Most recessions have been short and shallow. The recession of 1973–75 was 16 months long, and unemployment peaked at 8.5 percent. The recession of 1981–82 was also 16 months long, and unemployment peaked at 9.7 percent — about where it stands today.
These similarities are hugely important for economic policy. For all practical purposes, the Obama administration’s entire economy-policy framework is built on bolstering aggregate demand by goosing consumer spending and ramping up government spending.
In a world where national output has declined by nearly half — as it did from 1929 to 1933 — this approach is plausible (if still controversial). But in an economic climate that is characterized by recession, not depression, this aggregate-demand-driven approach is far more suspect. Recessions are typically caused by industrial restructuring or realigning supply and demand, not massive, across-the-board declines in output or income.
The steep recession of 1973–75, for example, was triggered in part by price shocks resulting from a quadrupling of oil prices. Persistent inflation complicated matters as the Federal Reserve used monetary policy to keep interest rates low while financing federal spending for the Vietnam War and massive expansions of social programs. Both these price effects resulted in significant reallocations of resources in the private sector as businesses, investors, and consumers adjusted to the new realities of higher energy costs, less access to private capital, and higher consumer prices. In economic terms, relative prices changed, and we had to adjust.
It is less well known that during this period, there was a dramatic shift in international competitiveness in manufacturing that required domestic industries to restructure and become more competitive. Once the economy reset its industrial “mix,” it began to grow again.