What’s Different This Time?
Ezra Klein explains the difference between the rapid recovery of Ronald Reagan’s first term from the sluggish one of Barack Obama’s in terms of initial causation:
The problem for the Obama-Reagan comparison is that this isn’t a Fed-created recession. It’s a financial crisis. And they take longer to recover from. For the economy to recover in 1982, the Fed just had to lower interest rates. For our economy to recover, consumers need to get out from the debt they’re under and then figure out how to keep spending more and more — or exporting more and more — under some paradigm that isn’t based on debt.
A different way of looking at it is to think of the recessions in nominal terms. Here’s Nominal GDP from 1980 to 1985:
The double-dip was associated with some flattening of Nominal GDP growth, but the deviation isn’t gigantic. What’s more, the super-rapid “catch-up” growth in real output that led us out of the recession didn’t involve anything unusually looking in nominal terms relative to the pre-recession trend. What happened was that the composition of nominal growth switched to one that involved less inflation and more “real” growth.
Compare that to more recent events:
That’s an entirely different kettle of fish. In nominal terms, we experienced a dramatically bigger recession than happened in the early eighties. Normally people think of “real” GDP as more important (that’s why they call it real) but for many purposes nominal numbers are very meaningful. My mortgage payments are denominated in nominal terms, as are my cable & phone bills, my salary, and various other contracts I’m involved with. When a huge gap opens up between the actual and trend levels of nominal economic activity, that means the best-laid plans of firms and households are all thrown out of whack. This is probably a situation the Federal Reserve could ameliorate if they were willing to produce enough inflation to push the price level back into line with trend, but if they continue to insist on a policy of opportunistic disinflation the adjustments will take longer.
17 Responses to “What’s Different This Time?”
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August 13th, 2010 at 3:23 pm
You should send this to Tyler Cowen. This is exactly the right answer to his question of two days ago. Monetary policy isn’t primarily about the unemployed, and focusing on adjustments in the market clearing price for the unemployed is just strange.
August 13th, 2010 at 3:25 pm
There are no jobs to go back to. In the new economy, when Apple needs to ramp up production they hire people in China not Silicon Valley. Speaking of which, Intel recently had it’s best quarter ever and Cisco reported a 27% increase in sales – they make all there stuff is made in China too. Unemployment in the region is something like 11%. Back in 82 we still made things in this country.
August 13th, 2010 at 3:36 pm
We’re still the #1 manufacturing country in the world, btw.
August 13th, 2010 at 3:53 pm
you need to back this one up and rethink it. The reason there’s only a scant nominal burp in the 80s was because inflation was quite high. The rising price level can conceal the real GDP decline (i.e., the fall in actual economic activity) when you’re looking at the nominal GDP series. In contrast, inflation was quite low going into the current downturn — the nominal series looks a lot like the real series.
Whether or not your “I live my life in a nominal world” framework is pertinent depends on the lag between price increases (due to inflation) and wage increases — if there’s a meaningful lag, it might feel just like the low inflation collapse in incomes.
This “price level trend” thing you’ve started going on about is also pretty dubious. You’re taking an unproductive detour here, find someone you trust and talk these issues through with them.
As far as available solutions, etc, are concerned, the “different origins” contrast, and the different interest rate environments, that Klein points to (and which you have as well, on more clear headed days I suppose) is really the important thing.
August 13th, 2010 at 3:54 pm
“The problem for the Obama-Reagan comparison is that this isn’t a Fed-created recession. It’s a financial crisis. And they take longer to recover from.”
Haha!!
Hopey may not have created the financial crisis but he’s not exactly solving it either. His policies are essentially the same as his predecessors right down to the men in charge. Obama was there when the banks were bailed out. Geithner and Bernanke misread the crisis as one of market liquidity. Neither has paid a price for being so wrong so often. Regardless of what happens, Matt and his friends among the kewl kids are here to tell us it’s not Obama’s fault. Nothing ever is.
August 13th, 2010 at 4:11 pm
By what mechanism can the Fed create inflation today? I know most everyone says they can by “printing money” or whatever, but what is the mechanism?
http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event
Unless and until there is a robust expansion of credit there will be no growth, or inflation if those are synonymous which is arguable. The entire Fed can save us if they only have the will meme is like a Hail Mary pass.
Coming out of the 80-81 recession was the biggest explosion in credit the world had ever known. It lasted for 25 years. Welcome to the downside.
http://websitebuilding.biz/wp-content/uploads/2009/08/total-us-debt-vs-gdp.png
*****Note on this chart. The huge spike in 29-30 was not caused by a spike in credit but the plunge in GDP.
August 13th, 2010 at 4:15 pm
In Reagan’s first term, oil got steadily cheaper which helped a great deal. There was no banking sector collapse, no messy overseas quagmires, much less two; and the national debt as a share of GDP was nowhere near what it is today. Comparing Obama to Bush at this point is ridiculous. Reagan was a very lucky president whereas Obama is a very unlucky one.
August 13th, 2010 at 4:21 pm
Also note on the GDP/debt chart that it is total systematic debt not national debt. It is the sum of all debt, public, private, corporate and financial. Despite 70 years of propaganda it makes no difference in our system who does the borrowing. The only thing that matters is that somebody does.
August 13th, 2010 at 4:26 pm
I’d be more impressed if you showed these plots on a log scale. As it is, the choice of scale exaggerates the scale of the recent recession compared to the 1982 recession.
August 13th, 2010 at 4:28 pm
The early 80’s recession was all about the Fed trying to get rid of “inflation expectations” so businesses would get over the 73 oil shock. With the boomers as a whole hitting their late teens into mid-30’s the 70’s, not the 60’s should have been America’s economic peak. Instead, the 73 oil shocks shook business confidence and impaired hiring the huge boomer labor surplus. So the economy fell short of what was needed. Inflation by the late 70’s was one quarter real and three quarters expectations.
August 13th, 2010 at 4:30 pm
When N says:
I guess I’d agree, but it would be silly not to mention that Regan did have to manage the Cold War, which was also massively expensive (and was a war that predated his presidency).
August 13th, 2010 at 4:31 pm
I’d be more impressed if you showed these plots on a log scale. As it is, the choice of scale exaggerates the scale of the recent recession compared to the 1982 recession.
I agree, the early 80’s recession “combined” at least to this point, is a little worse than the late 00’s recession, but they are definitely comparable.
August 13th, 2010 at 4:43 pm
N@7, there actually was a savings and loan collapse/crisis/what have you that began in 82/83, due to the fact that savings and loans, which made residential mortgage loans, found themselves holding asset portfolios yielding low rates (the loans had been made prior to the high inflation years) which they had to keep funded with high interest short term deposits and CDs. Many institutions began finding themselves under water, and the Reagan/Congressional solution was to loosen regulations on savings and loans, allowing them to start lending in markets that were riskier and less familiar to them. Take that situation and shake well for a few years and you have the Savings and Loan Fiasco that finally bubbled over badly toward the end of Reagan’s second term and which Bush I had to cope with.
August 13th, 2010 at 4:47 pm
Any loosening of regulations always lead to financial bubbles. Hard currency fools believe 100% reserves and gold standard will stop that. BHahahahahahahahahahahahahahahahahahahaahhaha. How wrong they are.
August 13th, 2010 at 5:01 pm
Matthew@8, the vertical range of the 80s chart is $3.5 Trillion while the vertical range of the contemporary chart is $5.5 Trillion; if anything the scale of the recent change in nominal GDP is understated in the contemporary chart, compared to the 80s chart. As I stated earlier, what hurts the charts is that the underlying rate of inflation (and hence the price level component of nominal GDP changes) was so much higher in the 80s example.
August 13th, 2010 at 5:04 pm
on second thought, I take some of that in 10 back; the percentage changes will differ markedly. However, I think the inflation rate differences still do the larger share of the damage.
August 13th, 2010 at 5:34 pm
well, now what was 10 is now 15, and Matthew@8 is now Matthew@9 — comment roulette’s a trip!