President Obama, writing in the Washington Post, said, “By now, it’s clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression.” But how would we know if and when this crisis is really more “deep and dire” than others?
Many may believe we’re in the worst recession since the Great Depression, if only because politicians and the press keep repeating that claim. But we need to compare some facts to discern whether this recession is (or will be) “worse” in some sense than those of 1973 – 75 or 1981 – 82.
Congressional Budget Office Director Douglas Elmendorf told the House Budget Committee that if the economy is still contracting by mid‐year, then this recession will be longer than the 1981 – 82 and 1973 – 75 downturns, each of which lasted 16 months. Yet this recession was quite mild until last September. And the severity and human discomfort of downturns can’t be measured by their duration.
A wise adviser to President John Kennedy, Arthur Okun of Yale, devised the “misery index” to gauge the pain of economic crisis — a measure that simply adds together the unemployment rate and the inflation rate. It hit 22 percent in June 1980, during an inflationary recession that preceded the Fed’s disinflationary squeeze of 1981 – 82. The misery index was nearly as bad in January 1975, at 19.9 percent.
Assuming inflation was close to zero this January, the misery index would have been roughly the same as the unemployment rate, or 7.6 percent. By this standard, we have a very long way to go before the economy feels nearly as miserable as it did in 1975 or 1980.
There are several other ways to measure economic distress, however, some of which are shown in the nearby table. The first two columns show the total change in real GDP and industrial production from the economy’s peak to its trough for that cycle.
Current data show only what happened so far, of course. But that gives us some idea of how much further the economy would have to fall to end up as “deep and dire” as the recessions of 1973 – 75 or 1981 – 82.
An average of 55 forecasters in the Jan. 15 Wall Street Journal survey expect real GDP to fall by another percentage point (a 2.1 percent drop in total) before recovering in the third quarter. If they’re right, this would be just the third deepest postwar recession by that broad measure.
Measured by unemployment, on the other hand, this might well be the second deepest recession. The current unemployment rate of 7.6 percent is quite unlikely to reach the postwar record of 10.8 percent. But the Journal forecasters expect the jobless rate to top out at 8.9 percent after the recession is technically over — making this very close to becoming the second worst recession in terms of job loss.
In a 1999 Business Week column, Harvard economist Robert Barro suggested we should also improve the misery index by adding a long‐term interest rate (and GDP). The table shows 30‐year mortgage rates. By that measure, there’s no way we’ll come close to matching the sort of misery of past recessions — notably, the 18.45 percent mortgage rate of October 1981.
With one exception — the steep 45 percent drop in the S&P 500 stock index since October 2007 — few other indicators of economic distress could support this being the worst postwar recession. Thanks to low inflation, for example, real disposable income rose every month during the fourth quarter — at an annual rate above 6 percent.
The president needs to be a calming voice right now, a source of strength. It’s not helpful for him to be warning of a “catastrophe” and making vague, untenable allusions to the Great Depression.
Recessions have almost always ended within a year or so, long before there was a Federal Reserve or Keynesian theory. Debts have to be worked down and excess inventories sold off so that profits, and therefore stock prices and wealth, can revive.
Such curative processes do not take years, as the president suggests — unless the government does too much foolish tinkering. But recovery will require more perspective and patience than we’ve been seeing from the White House lately, because time really does heal many economic wounds.