Not a “Great Recession”

This is from Rogoff:

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

Note that monetary policy is not mentioned alongside “fiscal policy and massive bailouts”.

And he goes on to say that:

In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Why talk about inflation, the dreaded word in the post “Great Moderation” world? Why not say “the Fed should strive to increase nominal spending by 7% or 8% per year until it brings nominal spending to a stated level and let the “chips” (the breakdown of spending between inflation and real growth) fall where they may?

In 1933 FDR got things going (later aborted by NIRA and still later by the Fed´s obsession with inflation) by setting a price level target and getting off gold.

At the present time, the view of Rogoff and many others that this is a balance sheet crisis, has done a lot of damage (the thought that only “time will heal” is prevalent) and many at the FOMC are fearful of inflation despite what´s happening in the real economy. But as reported today by the Commerce Department:

PCE price index — The price index for PCE decreased 0.2 percent in June, in contrast to an increase of 0.2 percent in May.  The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.

All in all it´s a Depression, albeit not a “Great” one, yet.

Update (8/3) Kevin Hasset joins the “This time is (not) different bandwagon. Not a single reference to Monetary Policy. It´s all about the futility of Fiscal Stimulus:

Obama administration officials should have known all this as they set out in 2009. Financial crises inevitably create lengthy periods of slow economic growth, as research by economists Carmen Reinhart and Kenneth Rogoff has shown. The typical duration of the employment downturn after a financial crisis is 4.8 years. Another study by Ms. Reinhart and her husband Vincent Reinhart found that economic growth rates tend to be lower for as much as a decade after financial crises.

It´s historical determinism!

11 thoughts on “Not a “Great Recession”

  1. First-rate blogging.
    ” I-yi-yi.” I am not sure if that expression makes it into Portuguese, but it is very appropropriate for what is happening at the Fed.


  2. BTW, I wonder if we NGDP’ers are being too timid in what we think the public will accept. I mean, what fraction of the American public even understand the Fed on a basic level?

    How many people would say, “I prefer zero inflation and a permanently weak economy to a good economy with some inflation.” Can we frame the argument in those terms?

    Rogoff’s column erred in the manner you state (the balance sheet stuff), but at least he was on the right track.

    “I can live with moderate inflation if it means boom times again.” Is this an idea we should float around?

    Yes, I am grasping at straws. In the dark.

  3. Benjamin
    We live in a “Politically Correct ” world. Some time ago (in portuguese) I argued that in part PC was responsible for the crisis! (I went all the way to 1964 and the Civil Rights Act). Yes, few understand on a basic level what the Fed does. But the word INFLATION scares the daylights of many.

  4. Yes, some commentators posture as if they would prefer to have AIDS than endure moderate inflation. I don’t get it. Was anybody ever killed by 4 percent inflation a year?

    But we have all seen men deflated by long-term unemployment, or business failure.

    I keep thinking something sinister is afoot. Does the right-wing just want Obama out? And they will then accede to a more growth-oriented Fed?

    Where does all this zeal for the purported virtues of low inflation come from?

  5. I prefer zero inflation and a permanently weak economy to a good economy with some inflation.
    I can live with moderate inflation if it means boom times again.

    If we’re thinking about how to persuade people that NGDP-targeting is the way to go, I believe the first option works quite a bit better than the second. In my experience, the phrase “boom times” evokes suspicion and concern on the left, on the right, and probably in the center, too.

    On the left, people often associate boom times with greed and rising inequality, or at least rising tolerance for inequality.

    On the right, many associate boom times with Alan Greenspan and too-easy money.

    People in the middle likely associate boom times with crashes. (What goes up must come down.)

    I’m not criticizing any of these positions, btw. Just attempting to describe them.


    * “some” inflation sounds better than “moderate” inflation
    * “good economy” sounds safer than “boom times”

  6. Catherine-
    I enjoyed your commentary. As the risk of sounding Quixotic, I hope the NGDP crowd can start framing arguments in a way that wins public support. This will require “talking points” etc.

  7. I have a fan!!?? I never had a fan before. I think I will be giddy the rest of this day.

    Thank you whoever you are, and I hope this day is a fun one for you too.

    A fan! I have a fan!

  8. Pingback: The Fed Can Raise Nominal Incomes Too! : Invest My Money

  9. Pingback: The Fed Can Raise Nominal Incomes Too!-Economic News | Coffee At Joe's

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.