The Recession in Context

Hysteria prevails in Washington, with “never let a crisis go to waste” the mantra. Loose talk about the present recession is so pervasive that many people don’t have a clear idea how it fits in the context of earlier downturns. The web site Calculated Risk prepared these helpful charts. This one shows the durations and percent decline on an annualized basis of the postwar recessions, with the current one showing a cumulative decline of 3.4%. What jumps out at me is the extraordinary stability of our economy for the last 25 years; an entire generation has come of age without experiencing what used to be considered a routine down-turn. Click to enlarge:


There is no technical definition of a depression, but a 10% GDP decline is sometimes used as a benchmark. This chart shows real GDP declines, peak to trough, starting with the Great Depression. Note that the post-war decline lasted only eight months and was considered a good thing, a wind-down from WWII. Again, click to enlarge:


What does it all mean? So far, the current recession looks a lot more like the other post-war recessions than the Great Depression. The unique feature of today’s economy is not the decline (so far) in GDP, but the financial crisis that has created chaos in our banks. Ironically, the Obama administration seems to have relatively little interest in that topic. They can’t even staff the Treasury Department, and have yet to come up with a coherent plan for shoring up the financial system. If the trend line continues downward, many will conclude that the Obama administration’s fecklessness is at least partly responsible.


Books to read from Power Line