PrintAugust 12, 2009
How to Fix a Recession
We are in a recession and our President has done something about it. What has he done? Spent well over a trillion dollars of other people's money, all borrowed. How well is that working now and how well have such "fixes" worked in the past?
There is no real indication that our current recession is ending. The NBER dated the beginning of this recession based almost entirely on payrolls, which last peaked in December 2007. Payrolls have declined every single month since then, including the most recent month, July 2009.
In July, payrolls declined by 247,000 jobs. That has been touted as an improvement, since we lost 443,000 jobs in June. However, 247,000 jobs are more than were lost in any of the first eight months of this recession under President Bush. A decline is a decline.
The same can be said for real GDP, which has declined for the last four quarters straight. While it declined less in the most recent quarter than in the previous, it still declined.
In January of 2009, before being sworn into the presidency, Barack Obama made a speech about this recession.
"If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. (His economists more precisely predicted unemployment to peak at 9% without his stimulus, and at 8% with it.)"That work begins with this plan -- a plan I am confident will save or create at least three million jobs over the next few years."There is no doubt that the cost of this plan will be considerable."At this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy."
How's his plan working so far?
(1) "If nothing is done, this recession could linger for years." Something was done and the recession is now 20 months old and counting.
(2) "If nothing is done, ... The unemployment rate could reach double digits." (More precisely, 9%, according to his economists.) Something was done, and the unemployment rate has already hit 9.5% and even President Obama is now saying we should expect 10% ("double digits") later this year.
(3) "...save or create at least three million jobs ..." In 2009 through July, we lost 3.6 million jobs.
(4) "...the cost of this plan will be considerable..." The cost of Obama's plan will be about $1.2 trillion in the short term: the $787 B "stimulus" plus the $410 B quietly added onto the FY2009 budget. But President Obama did not stop with the short term. His long term budget (2010-2019) has a 10-year cumulative deficit of $9.3 trillion according to the Congressional Budget Office, or more than double what it would have been under the laws left by President Bush. The lowest deficit projected for the next 10 years is $658 B; Bush's highest was $459 B.
(5) "... only government can ..." This is a more complex issue, to be addressed in the paragraphs below.
We have had 11 recessions since World War II, each starting about 6 years after the other -- 67 months on average, to be exact.
Post-WWII Recessions
Recession Start (NBER) | Duration | Real GDP Decline | Payroll Decline | Peak Unemployment |
Nov 1948 | 11 | 1.75% | 5.18% | 7.9% |
Jul 1953 | 10 | 2.65 | 3.39 | 6.1 |
Aug 1957 | 8 | 3.73 | 4.37 | 7.5 |
Apr 1960 | 10 | 1.58 | 2.29 | 7.1 |
Dec 1969 | 11 | 1.06 | 1.46 | 6.1 |
Nov 1973 | 16 | 3.19 | 2.69 | 9.0 |
Jan 1980 | 6 | 2.23 | 1.27 | 7.8 |
Jul 1981 | 16 | 2.87 | 3.10 | 10.8 |
Jul 1990 | 8 | 1.36 | 1.44 | 7.8 |
Mar 2001 | 8 | 0.33 | 2.04 | 6.1 |
Dec 2007 | 20* | 3.90* | 4.82* | 9.5* |
* This recession might not have hit bottom yet.
While our current recession is not yet over (as far as we know), it is already the worst among post-WWII recessions in terms of duration and decline in real GDP. It ranks second-worst in terms of payroll decline (1948) or peak unemployment (1981).
There is a very good case that we'd be out of this recession by now if we had done nothing special. If this were an average post-WWII recession, it would have been over about October 2008, just after Bush passed his bailout and the stock market responded with a nose-dive. If this recession matched the worst of the post-WWII recessions, it would have been over about April 2009, or just after Obama passed his stimuli.
Let's look a little deeper, and see how federal government fiscal policy worked in these previous recessions. The table below shows how government revenue and spending changed from the year the recession started to the following year. (Data source: US Statistical Abstract, historical statistics.)
Post-WWII Recession Federal Fiscal "Fixes"
Recession (NBER date) | Fed Revenue (%GDP) | Fed Spending (%GDP) |
Nov 1948 | 16.2 to 14.5 | 11.6 to 14.3 |
Jul 1953 | 18.6 to 18.4 | 20.4 to 18.7 |
Aug 1957 | 17.7 to 17.3 | 17.0 to 17.9 |
Apr 1960 | 17.8 to 17.7 | 17.8 to 18.4 |
Dec 1969 | 19.7 to 19.0 | 19.3 to 19.3 |
Nov 1973 | 17.6 to 18.3 | 18.8 to 18.7 |
Jan 1980 | 18.9 to 19.6 | 21.6 to 22.2 |
Jul 1981 | 19.6 to 19.1 | 22.2 to 23.1 |
Jul 1990 | 18.0 to 17.8 | 21.8 to 22.3 |
Mar 2001 | 19.9 to 17.9 | 18.6 to 19.5 |
Dec 2007 | 18.8 to 17.6 | 20.0 to 20.8 |
I'll save you some trouble: there are no clear patterns here. Specifically, more spending did not lead to milder recessions. I provide some correlations below. In each case, the fiscal measure (revenue, spending or deficit change as a percent of GDP) is compared to the measure of recession depth (real GDP shrinkage, payroll shrinkage and peak unemployment rate as percentages, plus duration).
Correlations
Revenue | Spending | Deficit | |
Duration (NBER) | 0.11 | -0.05 | -0.09 |
GDP | -0.56 | 0.18 | 0.41 |
Payrolls | 0.35 | -0.38 | -0.43 |
Unemployment | 0.30 | 0.31 | 0.04 |
The first thing to notice is that there are no strong correlations. The strongest correlation is between revenue and GDP growth: as federal revenues shrink more, real GDP shrinks less. That might suggest that a tax cut would tend to reduce the depth of a recession. There are weaker correlations suggesting lower revenues (e.g., a tax cut) could reduce peak unemployment and the duration of the recession.
On the spending side, the strongest correlations are with payrolls and unemployment, but in the wrong directions: the more the government spent, the more payrolls shrank and the higher was peak unemployment. (The causality with payrolls is likely in the other direction: shrinking payrolls cause federal revenues to shrink and spending to increase.)
Another huge data point is the Great Depression. In that case, the federal government went wild with spending. It went from 3.4% of GDP in 1930 to 10.7% in 1934, more than a tripling in size of the federal government. In absolute terms, it was an increase of 7.3% of GDP, or way more than any of the increases in the table above for post-WWII recessions.
Yet the unemployment rate went above 10% ("double digits") in 1930 and would stay above that level until February of 1941; it was as high as 20% as late as 1938.
In short, federal spending does not fix recessions; if anything, it makes them worse. Yet recall what President Obama had to say about spending and recessions.
"Then you get the argument: this is not a stimulus bill; it is a spending bill. Whaddya think a stimulus is? That's the whole point!"
He is also willing to put our money where his mouth is. According to the CBO, spending in 2009 will be 28.5% of GDP, or a 7.5% of GDP increase over 2008. That is a bigger increase in one year than Herbert Hoover and FDR could manage in four.
Let's review. In the 10 recessions after World War II, federal spending was correlated to worse employment figures. In the Great Depression, huge and unprecedented spending increases were followed by huge and unprecedented unemployment levels and duration. As Barack Obama might say, those are facts.
To believe that the things our government did to end this recession are working, one has to believe in something we cannot know: the recession would have been worse had we not done those things. Yet we do know what happened in 10 previous recessions when we didn't do those things: the recession ended in 6 to 16 months, whereas our current one is on 20 months and counting. And we also know what happened the one other time we did try massive spending as a fix: double-digit unemployment for more than a decade straight.
Economics is not hard, if you stop at a keen grasp of the obvious. Instead, today's economists (at least those consulted by Democrats) are at the same place the doctors of the 18th century were: the sicker the patient the more you bleed him -- all based on no evidence whatsoever.
Speaking of a keen grasp of the obvious, I grasp this: politicians know they don't know how to fix recessions. They claim they do for two reasons: (1) to make you think they are in control and at least trying, and (2) as an excuse to do what they wanted to do anyway.
The same man who said, "That's the whole point!" is now trying to sell the idea that he will cut health care costs by spending more than an extra trillion dollars on it.
More is not less. Up is not down. And freedom is not slavery. As someone once said, "It's a big fairy tale."
(Primary data source for GDP, payroll and unemployment numbers: the St. Louis Fed.)
Randall Hoven can be contacted at randall.hoven@gmail.com or via his web site, kulak.worldbreak.com.
