Comparing post WWII recessions

Comparing post WWII recessions


We do requests:

“I’m leaving on vacation or I would do it, but can someone do an overlay chart of the post-WWII recessions and the subsequent recovery? I suspect we’ll see a pattern. Recessions tend to end after a certain number of months, depending on the depth of the recession, whether Congress spends money or not.” – FH

Frank is leaving and I am just getting back from vacation, so I’ll take the baton. The following screenshots are from a nifty tool on the Minneapolis Federal Reserve Bank website. The red line is the current recession.

Post-WWII Recessions Tracked by Changes in US Output:

Post-WWII Recessions Tracked by Changes in Employment:

This is not the first time we’ve made these comparisons. A year ago, on the eve of a partisan passage of the trillion dollar stimulus package stampeded through Congress, we were also comparing recessions. Up to that point, this recession looked to be similar in depth and duration to the ’81 recession. Since then, coincident with the passage of the “stimulus” bill, this recession got worse. Is there a connection between the passage of the stimulus bill and the recession getting worse? Unlikely. Is there a connection between the passage of the stimulus bill and recession getting better now? Unlikely. You can read the charts and draw your own conclusions, but I’ll offer a few observations of my own…

First and foremost is the exact same point I made a year ago, which echos Frank’s sentiment:

“The graphic points out an interesting aspect of recessions. They all end. And, surprisingly, they didn’t all need a trillion dollar stimulus bill from the Feds to end them. In fact, all of them combined up to now did not need a trillion dollar stimulus to end.”

This is worth repeating. If you pass a stimulus bill, recessions end. If you don’t pass a stimulus bill, recessions end. If you pass a small stimulus bill, recessions end. If you pass a large stimulus bill, recessions end. Recessions end. Full stop.

In terms of US Output, the graphs show the 2007 recession to be comparable to the ’53, ’57, and ’81 recessions (slightly worse than ’81, not as bad than ’57). In terms of employment, this is the worst recession since WWII. By any measure, this recession is lasting longer than any recession since WWII.

In terms of output, the recovery is underway. In terms of employment, it is not. Justin asserts that “…credit needs to be given to [the administration] for helping turn our economy around in such a dramatic fashion.” I am not sure what is so dramatic about the longest recession and slowest recovery of any recession since WWII, nor am I sure why any administration would want credit for it. Still, Justin is the voice of moderation compared to the hero worshiping fantasy found in the comments.

Given that this is the slowest recovery from the deepest recession in the modern era, any argument on what impact the stimulus package or the Obama administration did or did not have on the duration or strength of the recovery can only be made on a counterfactual basis – “expressing what has not happened but could, would, or might under differing conditions”. Despite the massive expenditures, you cannot say this recovery is more robust than any that has gone before. The only case that can be made in defense of administration policy is speculation that the recovery would have been even more tepid without the stimulus.

Problem being, a case can also be made that the uncertainty created by this administration’s wild spending, insane deficits, threatened increases in health care taxes, likely increases in health care insurance premiums on employers, an energy tax (cap & trade), repeal of the Bush tax cuts, increases in the minimum wage, uncertainty created in the health care, financial, and energy industries with the imposition of radical government mandated top down changes in industrial policy – all contributed to increasing uncertainty in the private sector and made the recession worse.

Both are counterfactual scenarios. Neither can ever be proven with certainty.

There are statements about administration policy on the economy that can be made with certainty. Clearly, administration policy has cushioned the pain of the recession for many who were hit hardest. Realistically and practically, this is a legitimate and necessary function of the federal government. Another certainty is that only about one third of the stimulus package allocation has been spent, and a significant percentage of that was in the form of pork for congressional districts that was not focused on creating new jobs (but may have arguably saved government jobs at the expense of the private sector). Unsurprising, since the bill was written by Nancy Pelosi’s House of Representatives, slightly trimmed by the Senate, and rubber stamped by the President. Based on the percentage of the bill spent to date, it is unarguable that a focused bill 20-30% the size of the one that passed would have had the exact same effect of “turning the economy around in such a dramatic fashion” to this point – without further inflaming the deficit and currency fears the stimulus package produced.

So should we applaud the administration for the economic performance of a bloated, politics-as-usual, pork-filled stimulus package that passed a year ago on a strong-armed partisan vote? It did provide one valuable service. In a single stroke it disabused independents of any illusion that the Obama administration would be vaguely centrist, post-partisan, fiscally responsible, more transparent, or agents of change in Washington D.C. We were immediately back to old-style back-room dealing, partisan politics and favoritism pushed by a classic borrow, tax and spend liberal. It set the tone and became the template for everything that the administration has done since. Credit for turning the economy around? I remain unconvinced.

  • Miles

    I mean this in a helpful way, not a snarky one – but you need to look at monetary policy as well before just charting these side by side.

    Look up those years on a chart of the Fed Funds Rate over the past 50 years. Usually the Fed dropped rates when the recession started, and that easy money worked through the system and encouraged growth. Because this time they shot their load going all the way to zero, the current situation is substantively different – that same “cure” isn’t going to be the answer.

    This is independent of a longer discussion we can have on if or how to execute fiscal stimulus. First, can we just establish that a recession is different in a relevant way if monetary policy is NOT available as an option (because we’ve already gone to zero)? Which means these comparisons are not useful in the way you are doing them, sorry.

  • mw

    First, I am not generating these comparisons. The charts are generated by a tool on the website for The Federal Reserve Bank of Minneapolis who are…

    “…one of 12 regional Reserve Banks that, together with the Board of Governors in Washington, D.C., make up the Federal Reserve System — the central bank of the United States. “

    Which is to say – the organization responsible for monetary policy. Apparently they think it is valid to compare recessions in this manner, since they are the ones doing it. So… your beef is with the Fed, not me.

    I certainly concur that monetary policy is a major factor in managing the depth and breadth of recessions (or for that matter – depressions). Some even lay blame for this recession on the doorstep of the Fed and the Greenspan easy money policies that fueled the housing bubble.

    This sort of begs the question of whether it is really a solution to our economic woes to apply the same monetary stimulus policy that helped create the problem (not to mention the same fiscal policies that helped create the problem – encouraging consumption, discouraging savings, too much debt, making it possible for people to get mortgages for homes they cannot afford, propping up unsustainable housing prices, etc.) but – as you say – subject for a longer discussion.

    To get back to the post, While there are limits to what you can glean from the exercise, I think it is perfectly legitimate to compare recessions in this manner – at least to get a relative sense of how this recession stacks up in pain (unemployment) and duration to recessions that have gone before.

    Particularly if claims are being made that we should credit the administration for turning “our economy around in such a dramatic fashion.”

    “Dramatic” compared to what?

  • Miles

    Clarification: the problem isn’t with charting these next to each other to observe the pain, the problem is the claim that this proves recessions always end regardless of fiscal policy. In most of those cases you are observing monetary policy at work, whereas the original post suggests recessions just end on their own.

    Greenspan is a punching bag these days, but I agree he got it wrong at the end of his tenure. Fed mistakes cause very real pain, but as you say, the question of whether there is a better alternative is another long discussion. (I think they are better than the alternatives, but I know others disagree.)

    Regarding the stimulus, I think your best point was “Both are counterfactual scenarios. Neither can ever be proven with certainty.” I believed a stimulus bill was appropriate, but that particular bill was easy to dislike. My comments are NOT intended to support the “dramatic turnaround” claims – honestly I wish both sides would stop overhyping their policies and biases.

  • Doomed

    Breaking: Health Care Reconciliation Bill Posted – 2309 Pages – Includes Public Option – Updated

    There it is guys. Like I posted from the very beginning here. The Democrats will reconcille this will WITH a public option.

    Harry Reid promised Michael Moore that NO bill would go to the president for signature without a public option.

  • Doomed

    Correction. This is the house bill that the house has been fighting for but IS NOT the actual bill that will be sent to the senate for Reconcilliation.

    It appears the house is trying to cover their base by saying “this is what we fought for. If you have a problem go see your friends in the Senate”

    I surmise this was posted for intimidation reasons seeing as how its not going to be the bill that will actually end up being voted on.

  • mw

    Point taken. If we are looking to layer monetary policy on the post WWII history of recessions to glean some insight into what might be in store for our future, the ’81-82 Voelker Recession is instructive.

    Conventional wisdom is that the Keynesian tinkering combined with profligate deficit spending to pay for the Vietnam war and the liberal social engineering of the LBJ/Nixon era was responsible for the chronic inflation, unemployment and “malaise” of the Ford/Carter years. Voelker (yes – that same Voelker) then engineered the 81-82 recession to stomp out inflation with monetary policy.

    We are halfway to Carter era stagflation with high unemployment rates. Even when the employment picture starts improving, as it will, we are not likely to get much below 8% for a decade or more as the administration and congress pile more tax burdens on the economy. Only “free lunch” fantasists believe there will be no price to be paid in currency devaluation and inflation for the current insane deficit spending binge. If we follow a similar path, we can expect a high inflation, high unemployment “malaise” speech from Obama in early 2012. Of course – it will still be Bush’s fault.

    Bernanke will still be in charge of the fed. We’ll see then if he has cojones to defend the currency like Voelker did.

  • Miles

    @mw: I agree,in that I’ve bet my money on inflation (literally). At minimum I expect currency devaluation – which might not be a bad thing in some ways, except it will also increase inflation (via imports like oil getting pricier).

    The interesting thing about the early 80s is that Reagan’s legacy has been taken over by the anti-tax brigade, but the macroeconomic story is that he ran giant deficits – it was a very Keynesian time, in actual fact!

    (P.S. it would be funny to overlay economic charts that start with the Vietnam war vs the Iraq war and count out the months to disaster… Have you seen any such presentation?)

  • Tully

    Important footnote from the original source:

    The official month (quarter) marking the end of this recession, and the start of the recovery, has yet to be determined (see discussion below). Until the official date is announced, July 2009 (the third quarter) is used as an estimate.

    Or, as Yogi Berra once put it, it ain’t over ’til it’s over. Current signs don’t yet tell us it’s over — at best, they indicate we may have bottomed out. (Which would be a positive thing, but is far from a recovery.)

    We’ve had two “positive” quarters of GDP growth due to massive amounts of federal spending injected into the economy in various ways, but the amount of growth versus spending is showing once again that Keynesian multipliers applied to gov’t fiat spending as GDP drivers is a loser. Using the two-consecutive-quarters method of declaring a pullback as over as a standard would have had the Great Depression ending in 1933.

  • kranky kritter

    Tully’s right. While looking at the data and comparing may be interesting in some respects, the premise is in some respects suspect. We don’t really know what part of the curve we’re on with this current cycle. We just don’t. we will only be able to truly wrap our heads around this recession and subsequent recovery in retrospect.

    This kind of thing can be a virus of the blogosphere, this unwillingness to be patient and keep what we don’t know in the forefront of our minds. The chattering classes must have analysis, and no one who says it’s premature ever gets heeded, because there’s no fun or blather in that. Remind folks that time will tell, and ta-da, you’re tthe turd in the punchbowl.

    Now there’s nothing really wrong with doing the analysis, and it can be fun, instructive and useful as long as it’s contextualized as based on a still very incomplete data set.

    So let’s not lose sight of that. Past results are no guarantee of future performance, after all. Past recessions have only small general insights to offer us. They have no crystal ball power beyond very loose ballparking.

  • Sean Aqui

    Yes, recessions inevitably end. But I think you too quickly dismiss the ability to predict, at least in general, what would have happened without the stimulus.

    By any measure, $1 trillion (or even 30% of that) is a significant injection of economic activity, even in an $11 trillion economy.

    So it seems straightforward to look at the actual output and employment curves and say they would have been even worse had the extra government spending not occurred.

    Now, one can argue *long-term* effects of stimulus spending — basically, that it distorts the market, and that the long-term cost of the borrowing is not outweighed by its long-term influence on output.

    But I don’t see any way to look at the short-term effects and say that the curve would have looked the same or better without the stimulus package. What the curve is really showing is that this is the longest and deepest recession since World War II by a large margin — and that’s *with* the cushioning effect of the stimulus.

    I guess I just doubt that the speculative loss of GDP due to uncertainty about government intervention outweighs the actual effects of that intervention, especially when the intervention was relatively large and relatively immediate.

  • mw

    The problem with debating dueling counterfactuals, is that you have to pile hypotheticals on top of hypotheticals. Ah… WTF. Why not?

    First, I agree that if the stimulus spent-to-date did have a positive effect, it shows up in the output as a slightly softer decline to flattening to smallish up quarters of GDP. Tully hints at one problem – what happens when the heroin injections stop? More heroin to avoid the pain? No matter the problem, it always seems to be the same answer with this one trick pony administration – more new spending, more deficits, more heroin. No problem, there is an unlimited supply of heroin (printing money) and there are no consequences for the ever increasing doses. Right?

    Recessions perform a necessary function in the economy. They wring out inefficiencies, excesses and mis-allocations of capital. Until that happens, you don’t get a recovery. So here is a another hypothetical for you. It looks like the time to recover from the bottom of these recessions roughly mirror the time it took to get there – i.e.steep in – steep out – gradual fall – gradual recovery. So it is conceivable that the cushioning effect of the stimulus delays the time to get to the bottom (increases the time on a shallower bottom) and actually slows the recovery and lengthens the recession. If you inject enough pain-killers, you never really recover. Japan comes to mind.

    Then there is the employment graph. Hiring new employees in the private sector is an an act of extraordinary optimism and a giant leap of faith for any business large or small. It is an enormously expensive proposition which adds enormous cost and risk to a business (For extra-credit: compare and contrast to hiring in the public sector). That is why employment lags. No one in the private sector hires in anticipation of need (except in bubbles). Additional hiring is done only when there is no other choice, and the need is clearly visible in the rear view mirror.

    As near as I can tell, every single action of this administration exacerbates this effect. Who is going to take that risk of increasing hiring with the anticipation of additional costs layered on business by this administration? Everything from increased minimum wage, the prospect of increased energy taxes, increased health care premiums, increased health care insurance taxes and/or penalties, increased taxes from expiring Bush cuts, increased currency risk, increased inflation risk and if in the Energy, Financial Services, or Health Care industries (not a small part of the economy) significantly increased regulatory uncertainty and risk. Who in the private sector is going to hire into that environment? No one who does not have to.

    But I guess we can layer one more hypothetical on top of all that. The administration assures us that increased hiring in a federally subsidized alternative energy market, more teachers and new government bureaucracies will more than make up for the private sector and that will fuel the recovery in the “new economy”. So – no worries.

  • Sean Aqui


    Sure, if the stimulus is just an artificial “juicing” of the economy, when the juicing ends, you’re right back where you started.

    But a “well-conceived” stimulus (I’m assuming you think there is no such thing) serves three purposes.

    1. It buys time. Even if the economy was going to rebound in the same time frame anyway, it makes the depth of the recession less deep. And it also saves some businesses that had short-term barriers but excellent long-term prospects. It prevents the short-term barrier from killing a long-term success.

    2. It avoids piling on. Basically, this means all the bad news doesn’t happen all at once. Sure, that means some weak players don’t die as quickly as they should. But it also means that when they *do* die, the economy is better able to handle the failure. I don’t think it’s necessarily a bad tradeoff to have two weeks of moderate pain instead of one week of severe pain.

    3. It invests (at least partially) in the long-term. One purpose of the stimulus bill was to fund things that not only provided short-term jobs, but also provided long-term benefits. Infrastructure spending, energy investments, even job retraining all involve short-term money (which keeps people employed) but also long-term benefits that will help sustain economic growth. A sizable chunk of the $1 trillion price tag was tax cuts, which are clearly stimulative in the long term (though outweighed by deficits unless spending falls in tandem). A big piece of the rest was standard safety-net stuff (like extended UI benefits) that aren’t long-term stimulative, but also aren’t meant to be. They’re just a cost that must be paid in a recession.

    Our main disagreement may come down to a pure hypothetical: the extent to which we think businesses are “hanging fire” due to massive uncertainty created by the administration. You think that has a huge effect that drowns out any benefit the stimulus might have. I think the administration has not been particularly confusing in that regard, nor do I think the administration’s actions are *that* central to business decisions — other factors (like sales growth/decline, material costs, etc.) play a larger role. So any such effect, IMO, is at the margins rather than a main driver.

    For instance, I seriously doubt a significant number of employers are delaying hiring because of the health-care bill. For most employers, it will have no effect (just about every employer who already provides health insurance already meets the bill’s requirements). Indeed, it arguably makes it easier for them to *dump* coverage and save money.