Sunday, Aug. 12, 2012 | 2:01 a.m.
Is this the worst recovery in U.S. history? CBS Evening News anchor Scott Pelley claimed this recently, and television viewers have recently been treated to numerous commercials replaying this. The commercials, unsurprisingly, are paid for by American Crossroads, an anonymously funded super PAC created by Ed Gillespie and Karl Rove.
First, it is true by most reasonable measures that the Great Recession, which we are still recovering from, was the worst U.S. recession in 50 years. But U.S. history goes back much further, and there have been many worse recessions in our history, with much slower recoveries.
Does anybody remember the Panic of 1797? The Depression of 1815-21? The Recession of 1836-38? The post-Civil War recession? The Panic of 1873 and the resulting Long Depression? The Panic of 1893? The Panic of 1907? The Depression of 1921? The Great Depression? I doubt folks did their homework.
How can we objectively measure the depth of a recession or the speed of a recovery? Pelley used unemployment rates. Though the national unemployment rate actually rose higher in 1983, to 10.8 percent versus a peak of 10.1 percent in 2009, it came down faster then. However, the unemployment rate is not available for most of our history, and it is hard to compare over time. It also rises when the long-term unemployed start looking for work again because the economy is improving.
Economists think a better measure is average economic output, as measured by real (i.e., inflation-adjusted) gross domestic product per person. By this measure, the current recession was deep. From the last quarter of 2007 to the second quarter of 2009, average output fell by 5.9 percent (normally it would have grown by 2.9 percent over that period). The previous postwar record was minus-4.7 percent, set in the recession of 1957-58 (when the unemployment rate topped out at only 7.5 percent).
But this Great Recession pales in comparison to the Great Depression, when average output fell by almost 30 percent, unemployment rose to 25 percent over four years, and it took 10 years before real GDP per capita reached its prior peak. There are at least five other, earlier recessions where average output fell more than our recent recession and where real per-capita GDP remained below its previous peak more than five years out.
It is simply not true that this is the worst recovery in U.S. history. Since this economy hit bottom in 2009, economic growth has been positive but unimpressive, not enough to create the jobs needed for all those who lost their jobs plus those who enter the workforce each year. However, the economy will regain its previous peak in this quarter, a duration of less than five years.
There are at least four major reasons why this current recession and recovery is worse than most postwar recessions. None of these reasons have been addressed by the political commercials I have seen.
First, this was the first “balance sheet” recession since the Great Depression, not the garden-variety recessions that most of us have experienced. The recession that began in 2008 was caused by a bubble in the housing market that burst a couple of years before and a financial crisis that left us on the edge of an abyss in the fall of 2008. As both the Great Depression and Japan’s lost decade show, recessions like this are almost always deeper and longer than most recessions, and much harder to recover from, no matter what the government does.
Home equity is the primary asset for most middle-class families, and the collapse in home prices substantially reduced the wealth of most Americans, affecting their spending. Businesses also found themselves with severely damaged asset values, and so used their profits to pay down debt rather than hire more workers.
The second reason is that the biggest decline in the economy came from the reduced construction of new homes, and this residential investment has been very slow to recover. Business investment, by contrast, has mostly recovered to its pre-recession peak. Does anybody really think residential housing construction was likely to bounce back quickly to pre-recession levels?
Third, this recovery has been led by exports, but the financial crisis exacerbated economic problems in many other countries. Recessions elsewhere led to reduced tax collections, and many countries had to bail out their banks, too. The resulting budget deficits and bond market worries led to austerity policies that made these foreign recessions even worse. The result is that foreigners have lower incomes and are buying fewer of our goods and services. It becomes hard to sell what we produce when fewer people are able to buy, either here or abroad.
The final reason is because this is the first postwar recovery in which real government purchases of goods and services — by state, local and federal governments — actually shrank.
After the 2001 recession, real government purchases grew by about 5 percent per year. After the recession of 1991, these purchases grew by about 2 percent per year. In the recession of 1982-83, government purchases grew by about 5 percent per year. In the recession of 1974-75, it was about 3 percent per year. Such increased purchases by the government have always helped the economy recover.
In contrast, from 2009 to 2012, total government purchases, particularly those by state and local governments, fell. The federal deficit only rose because taxes fell and transfers rose.
It is ironic, then, that so many commercials argue the complete opposite.
If you remove government purchases from the equation and only look at GDP purchased by the private sector, you find that the private economy actually is recovering faster now than in the three years after the 2001 recession under President George W. Bush. However, the crash of 2008 left the economy at a much lower starting point than in 2001.
We need a debate over how best to lay the groundwork for future economic growth. We need, however, to stick to the facts and avoid unsubstantiated hyperbole disconnected from any real understanding of what has happened. I fear this is a lost cause until after the election is over.
Elliott Parker is chairman of the economics department at UNR.