We mostly hear about how bad this recession has been, even being called “Great” when not “Lesser Depression”. What has been lacking is a description of the recovery. What we often hear is that the economy is growing so that additional measures, be them fiscal or monetary, are not needed.
But Ed Lazear, a former chairman of the Council of Economic Advisors in the Bush administration, did just that, calling the recovery the worst in history. The chart below illustrates his arguments, only I concentrate on the behavior of nominal spending (NGDP) instead of the usual comparison of real GDP because NGDP is what the Fed can influence closely.
For the first time since the 1930s, NGDP growth turned negative after mid-2008. According to Friedman´s “plucking theory”, given the depth of the drop, the rebound should be pretty strong. Unfortunately it isn´t and note the much stronger rebound after the much deeper drop in 1929-33. After the recession of 1981-82, during which spending growth never turned negative, the rebound was much stronger than what we see today.
Lazear tries to find explanations for the “worst economic recovery in history”. They´re lame and he isn´t too excited about them. And the policy with the best chance of returning the economy to a point closer to its long term average growth is monetary policy. Not through ad hoc “stimulation” but from setting a clear level target (preferably NGDP) and “shooting for it”.
Update: Carmen Reinhardt & Rogoff want to “recalibrate the thermometer”:
We have suggested that the concepts of recession and recovery need to take on new meaning. After a normal recession (which for the average post-World War II experience in the U.S. lasted less than a year), the economy quickly snaps back; within a year or two, it not only recovers lost ground but also returns to trend.