Thursday, February 9, 2012

2007 Recession vs 1981 Recession

Many people compare the 2007 recession it to the Great Depression, claiming it was worse than anything since then.  Not true.  It has not been anywhere near as bad as the Great Recession.  

In fact it is most similar to the 1981 recession.  Here are some facts from wikipedia about the 1981 recession:

  • US/Japan got out earlier than other countries
  • It was caused in part by the Fed trying to lower interest rates.  This failed to lower inflation, but did slow down economic growth.  Inflation hit 15% and took about 5 years to get to 2%
  • Unemployment rose from a bit under 6% to 10.3%,
  • Keynesian think deficit spending and lowered interest rates created the recovery.   Conservatives insist it was lower taxes. 
  • While the official length of the 1980's recession is 14 months from July 1981 to November 1982 public opinion was about 3 years.  This is because a the official terminology for 'recession' refers to things getting worse.  Just because things are getting better does not mean they are 'good times' yet.
  • Stock market fell about 18% right after the recession, but was up to 15% again for the next 3 years.

Compare that with the 2007 Recession
  • It looks like the US may be recovering first, again
  • Unemployment went from 4.5% to a bit over 10% (now clearly headed down)
  • Most people think the recession was in large part due to a housing crisis initiated by poor decisions from financial institutions.  Some claim it was Liberal Agencies (Fannie Mae), others claim it was capitalistic banks.
  • Keynesian think deficit spending and lowered interest rates would cause the recovery.   Conservatives insist it on lower taxes. 
  • They kept inflation fairly low from 2% to about 5%.   Th
  •  Official lasted 18 months, from Dec 2007 - June 2009.  As of 20012, clear signs of a recovery are showing - lower unemployment, but unfortunately it is a  slow improvement.
  • Stock market fell about 39.2% and is still down 9.9% after the recession.
The main reason people liken Bush's recession to the Great Depression is not how long it went or the economic recovery.  Instead it is the stockmarket crash and the slowness of the unemployment recovery.

I have talked before about how little the President can do to prevent or fix a recession.  That is why I am using the year instead of the president's name.  But note that Obama was not president until January 20th of 2009 - the recession 18 month recession officially ended 5 months after he took office.   You can't really expect more than that.

So lets talk about the real reasons for the slow recovery - and that's what it is, not a recession.

  1. Tax treasuries were destroyed, and governments shrunk - mainly by firing people.  Business can only find so many new jobs, particularly if more people keep being fired by the government.  Honestly, Bush's wars and tax cuts depleted Clinton's surplus so we had no cushion to fall back on.
  2. At the same time, the military has begun to send people home.  This made the job market worse.
  3. Low inflation but not lowering prevented natural recovery of the housing market.  If inflation dropped, people could refinance, if we had higher inflation, house values would go up with inflation, and people could sell them at a profit, or at least break even and avoid bankruptcy.
  4. The government was heavily and partisan-y split about how to fix the problems.   One side insisted on cutting taxes, the other insisted on increasing services. Throw in a reasonable refusal to let the deficit balloon even more, and you get a political war.   They only kept the interest rates down - they were too low to really lower them any more.

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