August 03, 2009
Comparing the Current Recession and the "1980-82 Recession"
At least one observer has argued that the current recession is not as bad as that of the 1980-82 recession, when those two separate recessions (1980Q1-1980Q3; 1981Q3-1982Q4) are considered as one (see  ). Here is my interpretation of this assertion, updated to use the latest GDP data, and normalizing (log) GDP on the recession start dates.
Figure 1: Log GDP relative to 2007Q4 (blue), log forecasted GDP relate to 2007Q4 (teal), and log GDP relative to 1980Q1 (red). Source: BEA GDP 2009Q2 advance (July 2009), WSJ survey of forecasters (July 2009), NBER, and author's calculations.
Notice that, using the WSJ mean survey forecast from early July, the current downturn will exact a bigger (percentage) output loss than the 1980Q1-1982Q4 recession; if we assume the current recession trough ends up being 2009Q2, then the cumulative loss relative to previous peak will be 9.6 percentage points, while that for the "1980-82 recession" will be 2.5 percentage points.
Posted by Menzie Chinn at August 3, 2009 09:41 PMdigg this | reddit
Combining the '80 and '81-82 recessions seems more reasonable if you look at it in terms of the unemployment rate. While output did recover in between the two recessions, as your graph shows, the unemployment rate only improved slightly, and never got back to its pre-recession level before the second recession began. So 1980-82 could be thought of as a long period of mostly rising unemployment, interrupted by a leveling off from mid-80 through mid-81.
Posted by: Bill C at August 3, 2009 10:59 PM
How about unemployment? I consider it the more important measure because, frankly, we are plenty rich on average and living on 90 percent of last year's income (or even 80 percent, given the savings increase) is not such a big deal. It doesn't seem improbable that we could wind up with more unemployment than in the 1980s, but from the last data I saw we aren't there yet. Does this picture change with consideration of the broader unemployment and underemployment measures? Or with the difference in pre-recesion income distribution?
Posted by: Michael at August 4, 2009 04:42 AM
Is comparison, reason if not all economic parameters are covered throughout the contemplated periods?
As a sample
Total US debt rose from 163 % of GDP in 1980 to 370 % in 2009.
Whereas for the 10 years yields and Fed fund yield:
The fed funds rate reached 20%. The fed funds rate was volatile during the period starting at 12% reaching 20% and then finishing the 19 week period at 16%. The 10 year yield rose 9.2% over the period, but did fall in the week following the inversion by almost 5%. The chock was harsh and the US economy could sustain it.
The rebound elasticity is predicated upon the soundness of the public,private household finance
Posted by: ppcm at August 4, 2009 04:48 AM
The current recession was really more of a 19th century panic (see Gorton). The effects were both financial and energy-linked. The financial effects--a partial meltdown of the financial system--did not occur in 1979. Rather, the US had a number of structural problems then--high taxes, high regulation, combined with a loss in Vietnam and a feeling that free markets were doomed--which made it more of a grinding recession as Volcker's tight money policy slowly squeezed inflation out of the economy. So this recession felt to me more acute (like a knife wound); the 1979-1983 recession felt more like a marathon or a 15 round boxing match.
Another important distinction is the role of oil. In both 1974 and 1979, OPEC raised the price of oil by hefty amounts--and left it there. Much of the grinding of the 1979-1983 period is the US and global economy shedding oil consumption, about 5% of GDP during the period.
In the current recession, oil prices fell quickly; therefore the impact was transitory (and if you look at Jim Hamilton's model (AR4), it does indeed suggest a May trough).
However, we are by no means out of the woods. On a pro forma basis, I project that this period ends with a lock-out of OECD oil consumption; that is, OECD oil consumption never recovers to its pre-recession levels. So peak oil--because that's what we are talking about--will bring the 'grinding' aspect back to the recovery, probably from next year.
You can see more on the history of the oil and recession here: http://www.dw-1.com/files/files/438-06-09_-_Research_Note_-_Oil_-_What_Price_can_America_Afford_-_DWL_website_version.pdf
Posted by: Steve Kopits at August 4, 2009 06:39 AM
Casey Mulligan made his case by focusing on output and then normalized to the end date (which we don't really know yet). Normalizing to start date is an improvement but because time, and consequently growth in potential output, is always a factor, it still doesn't get to the heart of the problem.
A better measurement of intensity would be output gap or, as a proxy, the difference between peak unemployment and NAIRU. Since NAIRU was 6.0% in 1982 and peak unemployment was 10.8% the difference is 4.8%. Similarly since NAIRU is currently 4.8% and unemployment was 9.5% in June the difference is 4.7%. The current difference is smaller so far but I suspect by the end of the week (when July's figure is released) we will know better.
P.S. One might go still further and consider the duration of the output gap. In other words one could calculate percentage-output-gap-years, or the area between actual output and potential with potential normalized to unity. To my knowledge, nobody has attempted that so far.
Posted by: Mark A. Sadowski at August 4, 2009 08:09 AM
The 1980-82 recession (which is correctly regarded as one big recession - it should not be split due to that most minimal of recoveries in between), was not so bad for either GDP or the stock market. Only employment was heavily hit.
In this recession, ALL measures are heavily hit.
Posted by: GK at August 4, 2009 09:00 AM
There is some chance of a second, smaller recession starting in late 2010 as the tax cuts expire and higher interest rates much housing prices down another leg.
Posted by: GK at August 4, 2009 09:31 AM
The big difference is demographics. In the early 80s recession the boomers were just starting their adult life with plenty of years ahead to increase their income levels. In this recession, boomers are getting laid off at peak earning years and aren't finding jobs to replace these earnings. They won't be increasing but decreasing their earnings output in the future. The X Generation is lower in numbers and also are far more in debt than the Boomers were at the same phrase in the earnings life cycle. The Y generation is of equivalent size to the boomers but will take a couple of decades before their income will be significant levels. The US might be facing a slow growth decade.
Posted by: DR at August 4, 2009 09:58 AM
To the extent that it represents a weak period in sum, I can understand why some would think of the two early 80s recessions as one. But from an economic perspective, these were two distinct recessions. People often forget that the second recession was deliberately induced by Volcker to stem inflation. The second recession didn't occur because the economy was weak; it happened because it was choked to death. Correctly, I should add.
Posted by: Steve at August 4, 2009 10:19 AM
I'm only 37, but I'd bet dollars to donuts that those who lived through it as adults consider the entire period from '73 to '83 as one big economic morass, on average. It just wasn't a good decade.
Posted by: Buzzcut at August 4, 2009 11:52 AM
The 1980 - 1982 recession was very different in so many respects, fiscal policy, monetary policy, commodities, structural characteristics. I wouldn't know where to start to compare the two but how about doing some real analysis instead of just posting GDP charts? That's too facile.
Posted by: JR at August 4, 2009 12:13 PM
The early 80s recession was an undesirable side effect caused by bringing down the inflation rate. The recession of today was caused by the Fed screwing up--specific, their decision to drive down the M1 money multiplier by paying interest on reserves.
Posted by: Richard A. at August 4, 2009 12:44 PM
JR: I am sorry -- what constitutes "real analysis"? Clarification would be welcome.
Posted by: Menzie Chinn at August 4, 2009 12:45 PM
While it may be difficult to say as of now which recession is worse, with the benefit of hindsight in a few years I think this recession will end up being considerably worse due to the deflationary impact of the bursting of the largest credit bubble in the postwar period.
I also think that the entire economic situation has gotten so out of control now that the Fed is like an addict who realizes his actions are wrong, but he continues to do them nonetheless because he is so used to it and has never learned to do the opposite. The Fed is trying to prevent deflation (defined as the contraction in credit), when deflation is what is needed to eventually put the country on a healthy and sustainable path in the long run. Consumers should be spending less, saving more, and learning to live within their means without excess borrowing.
Posted by: jturner at August 4, 2009 01:22 PM
This current decade hasn't been so hot.
Posted by: Steve at August 4, 2009 02:54 PM
The two periods are so different as to deny comparison.
The 1980-82 recession was the Volker recession caused by his significant contraction of the money supply just as the economy was beginning to recover from the Great Inflation of the 1970s. This was no bubble driven decline but a monetary driven decline.
The current recession is more kin to an Austrian boom-bust cycle where the FED allowed the money supply to expand at the same time congress was giving special treatment to real estate channeling the excess money into loans. This was a government created malinvestment that finally burst leaving destroyed capital that Keynesians point to as underconsumption. I guess you could say there was Keynesian underconsumption in Dresden after the firebombing.
Posted by: DickF at August 4, 2009 03:38 PM
I decided to put my money where my mouth is and calculate percentage-output gap-years. data for real GDP comes from the BEA of course. Data for potential real GDP comes from the CBO. The major problem is of course that the BEA has recently considerably revised recent GDP figures but the CBO has yet to follow up.
The 1980-1982 recessions fell into an output gap in the first quarter of 1980 and stayed there through the third quarter of 1987. The peak in output gap occured in the fourth quarter of 1982 and was 7.4% (a post WW II record). The total output gap was approximately 18.2% of potential annual GDP (also, by far, a record).
If one assumes that GDP equaled potential GDP in the fourth quarter of 2007 and then assumes growth in potential GDP similar to previous CBO projections from that point on one finds the following. The output gap in the second quarter reached 7.3%, or just a tenth of percent less severe so far. The total output gap so far is approximately 5.6% of annual GDP. Thus it ranks in fourth place after the 1980-1982 recessions, the 1990-1991 recession (7.9%) and the 1974-1975 recession (7.4%) in that order (so far). (Interestingly although the 1990-1991 recession was not sharp, due to the slowness of the recovery it ranks second by this measure.)
Since it we are only six quarters into this recession it might be a better comparison to look at the other recessions at that point. Six quarters into the 1980-1982 recession we had a total output gap of only 2.5% of annual potential GDP. The worst (other than the current recession) was actually the 1974-1975 recession at 4.8% of potential annual GDP. The second worst was the 1990-1991 recession at 3.8% of potential annual GDP. Six quarters in, this is the worst post WW II recession, by the percent-output-gap-years measure.
Posted by: Mark A. Sadowski at August 4, 2009 04:55 PM
The entire 9-year period from 1974-82 was terrible, of course. It would have been a depression except for the fact that :
1) Baby boomers entering the workforce kept consumer spending propped up, and enabled many first-time home and auto purchases to happen.
2) High inflation, while bad, at least ensures that depressions are avoided.
The perfect timing of the demographic wave kept us out of a GD in 1974-82.
Posted by: GK at August 5, 2009 12:18 AM
You are correct. I was 17 in 1974, we were the peak of the babyboom numbers. We boomers have been farmed by our parents and grandparents for the better part of 50 years. In social security alone if allowed a 3% annual return, I would have $1,083,000 in savings. Instead, the "greatest generation" ponzied us out of SS, medicare, 401k and now wants us to fall for national health. This is going to be a very mean decade indeed.
Posted by: Steve at August 5, 2009 07:25 AM
The last decade has been pretty bad, especially if you're my brokerage account. ;)
I should have been investing in gold, apparently. Or just paying off my mortgage.
Stocks were for dummies, sadly. My "Investing for Dummies" book let me down, but maybe I should have known that from the title? ;)
In all seriousness, the political upheaval in the late '70s (Prop 13, Reagan election) should be considered a revealed preference. People were having trouble dealing with stagflation. At least we don't have that problem.
The difficulty with which Obama is having getting his agenda passed (in contrast with Reagan) may be telling us that people just wanted a change from Bush, not a wholesale lifestyle change.
Posted by: Buzzcut at August 5, 2009 07:28 AM
I think Buzzcut is right on (which isn't always the case, IMO). Even though we really do need massive change to right the good ship USA, it is almost certainly not the same change that Obama and the entirely Democratic Congress seem to have in mind or seem to have concluded was their mandate. I have long thought that whoever was elected in 2008 would be a one term president and I still believe that's true. Wouldn't it be great though if that was because he was actually trying to do the difficult things that need to be done and succeeding vs doing the same old stuff and failing?
Posted by: Footwedge at August 5, 2009 08:29 AM
Investing for dummies... there was a good article in the WSJ about the "failure of diversification".
In my mind, it worked perfectly. For example, the old rule of thumb that your age should be the percent of you investments in bonds. A 60 year old man would have 40% equities and 60 treasuries.
Stable investments such as treasuries and gold performed exactly as advertised.
Too many of us listened to Jermey Siegal.
Posted by: MikeR at August 5, 2009 10:15 AM
In many ways our entire society is a victim of JM Keynes. We live in a society that is infected to its core with consumption. GDP slides increase consumption. Slow sales give more credit to consumers for consumption. Affordable housing FHA, Fannie, Freddie,mortgage bonds, ARMS, no down loans, balloon payments.
The best thing I ever did is break the habit and return to sanity. My house is paid for so I do not have to worry about foreclosure. My car is paid for so no bank will repossess. No credit cards, no furniture loans, nothing. Most people look at me as a fool because my credit rating is probably zero because I don't use credit. Guess what? I am happy as a lark. That 85-90% everyone else is paying to the banks I am spending on dance lessons.
So when you talk to me about stimulating consumption you will know what my smile is all about.
Posted by: DickF at August 5, 2009 11:09 AM
Consider the federal debt to GDP ratio.
The Investopedia says, "The debt-to-GDP ratio indicates the country's ability to pay back its debt." This ratio often is quoted in stories predicting the demise of America if federal debt continues to rise and especially if the debt ever were to exceed GDP. This ratio is so important, the European Union once required, as a condition of membership, the ratio of gross government debt to GDP not to exceed 60% at the end of the preceding fiscal year.
But, how meaningful really is federal debt-to-GDP?. In August, 1971, we finally divorced from the last vestiges of the gold standard, giving the U.S. government the unlimited power to create money with which to service its debt. GDP has no affect on that. Even with zero GDP, the federal government could create the money to pay its debts.
Ah, but doesn't "printing money" cause inflation? Apparently not. In the past 50 years, every spike in debt growth has corresponded with a decrease in inflation. The reason for this counter-intuitive lack of correlation between inflation and money supply: Inflation has been more affected by the supply and demand for oil than by the supply and demand for money.
Further, GDP is production-based, while inflation is consumption based--two significantly different measures. So in the Debt/GDP fraction, neither the numerator nor the denominator refers to inflation.
And as for that artificial 60% barrier, consider these ratios: Japan's debt is 170% of its GDP. Italy's is 100%. "Wealthy" Russia's debt is only 6% of GDP. The U.S. is above 60% and growing.
So what does it all mean? It means the oft-quoted bogeyman measures nothing, evaluates nothing and predicts nothing. It is the classic apples/oranges comparison, effective only in scaring politicians and voters into making the wrong economic decisions.
About the only meaningful statement one could make about federal debt vs. GDP is this: For the past 50 years, decreases in federal debt growth have led to decreases in GDP growth.
Rodger Malcolm Mitchell
Posted by: Rodger Malcolm Mitchell at August 6, 2009 07:17 AM
I just read Romer's assessment of ARRA at the five month mark. Its relevance to this comment thread is her estimate of the output gap during the second quarter: 7.5%. (My estimate of 7.3% is pretty close to hers.) The implication of this is of course that, if this is true, then this recession already exceeds the 1980-1982 recession(s) by this measure (it peaked at 7.4% in the fourth quarter of 1982). Romer's assessment is available here:
Posted by: Mark A. Sadowski at August 8, 2009 08:17 AM
There is some chance of a second recession in late 2010-2011, because of a) tax cuts expiring, and b) rising interest rates pushing housing down another leg.
The current situtation of 0% FF rates is artificial.
Posted by: GK at August 8, 2009 11:03 AM