Tuesday, September 18, 2012

Is the 2007 recession worthy of the title the “Great Recession”?

Commentary by James H. Shott

It is widely accepted that the recession of 2007 was the most serious since the Great Depression, and it has been given the pithy moniker “Great Recession” by folks who like the air of importance and weight the comparison adds to this particular downturn, and by those who have a compulsion for pithy monikers.

There have been 13 recessions since the Great Depression: 1937, 1945, 1949, 1953, 1958, 1960-61, 1969-70, 1973-75, 1980, 1981-82, 1990-91, 2001, 2007-09. Only four lasted more than a year, and none of them featured a drop of Gross Domestic Product (GDP) more than a fraction of the drop in the Great Depression.

However, during their time some of the other 13 recessions were also called the “Great Recession” by those of like mind to today’s pithy title advocates. The title was suggested for the recessions of 1973-75, and 1980, the 1990-91 and 2001, but the name didn’t stick because the event didn’t measure up to the name. Therefore, the question: was 2007 really the worst recession since the 30s, and even if it was, does it warrant that momentous moniker?

According to the National Bureau of Economic Research, the 2007 recession began in December of that year, lasted 18 months, and ended in June 2009. GDP fell to a low point of -5.1 percent, and the U-3 unemployment rate hit 10.0 percent in October of 2009.

Before that, the last recession with similar specs began in July 1981, lasted 16 months, and ended in November 1982. GDP bottomed out at -2.7 percent, and unemployment rose to 10.8 percent (U-3) in November of 1982.

The answer to whether ’07 is the worst since the 30s depends upon the criteria one uses to define what “worst” means. Generally, the key factor in determining the “if, when and how bad” of recessions is GPD, but unemployment and duration also matter. So how does 2007 measure up?

Using negative GDP as the measure, the recessions of 1937 (-18.2 percent) and 1945 (-12.7 percent) dwarf the 2007 recession. However, 2007 is the worst since 1945, using that measure. If the U-3 unemployment rate is the measure, the 1981 recession takes the honor. If duration is the measure, 2007 edges out 1973-75 and 1981 by only two months.

By contrast, the Great Depression posted peak numbers in all categories that make all of the recessions look mild, including 2007: duration = 55 months; unemployment = 24.9 percent (even using the broader U-6 number for 2007, which is closer to how unemployment was calculated in the 1930s, the Great Depression still wins this one); GDP = negative 26.7 percent.

Without downplaying the pain and suffering people are feeling today, objectively we should expect that for a recession to earn the title “Great Recession” – really earn it – it ought to clearly dominate in the cited categories over other recessions. The 2007 recession does not. It was significant, but not all that remarkable, compared to its namesake, the Great Depression.

What is remarkable is the virtually non-existent recovery. Therefore, a more apt term to apply is the “Great Lethargic Recovery.”

Conn Carroll is the Assistant Director for Strategic Communications at The Heritage Foundation. Comparing the current slow recovery to the Reagan Recovery of the early 80s, he writes that the last recession that lasted at least 16 months began in July 1981 in Ronald Reagan’s first term, and ended in November 1982. “In his 1983 State of the Union Address,” Mr. Carroll wrote, “President Reagan described an economic situation that mirrored our own today: ‘The problems we inherited were far worse than most inside and out of government had expected; the recession was deeper than most inside and out of government had predicted. Curing those problems has taken more time and a higher toll than any of us wanted. Unemployment is far too high.’”

Under Reagan’s policies the unemployment rate fell from a high of 10.8 percent in December 1982 to 7.2 percent in November of 1984 – that’s a 3.6 point improvement in 23 months.

That is a striking difference from the 2007 recession, where unemployment peaked at 10.0 percent in October of 2009 and has never been below 8.0 percent in the 43 months since.

“But where President Obama responded to an economic recession with a bigger than $2 trillion expansion of government (more than $1 trillion on health care and almost $1 trillion in economic stimulus),” Mr. Carroll notes, “President Reagan passed the Economic Recovery Tax Act of 1981, which cut marginal income tax rates across the board permanently.”

He continues: “Where President Obama promised government action that was ‘bold and swift,’ President Reagan said: ‘The permanent recovery in employment, production, and investment we seek won’t come in a sharp, short spurt.’ Where President Obama used tax credits, subsidies, and bailouts to perpetuate industries in need of adjustment, President Reagan helped the private sector forge a quick recovery.

President Reagan’s sensible economic prescription worked. The low-tax-rates and reduced regulation stimulated economic growth and created jobs. And his America-is-the-hope-of-the-world philosophy buoyed spirits.

However, President Obama’s ideologically-based ideas of taxing the rich, always seeing government as the solution, and negative America-causes-the-world’s-problems attitude have not worked.

Cross-posted from Observations

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