It´s all in the framing

Over at Economix, Catherine Rampell writes a piece entitled: Is This Really the Worst Economic Recovery Since the Depression? And she puts up this chart.

Her conclusions are mixed:

Economists often assert that we are in the worst recovery since the Great Depression. Are we?

Not technically, but it’s still unusually bad.

Certainly the economy is in an abysmal state, and we still have about five million fewer jobs than we had when the recession began in December 2007. But the level of economic activity is so low chiefly because the recession itself was so severe; indeed, on many economic indicators, the Great Recession was the deepest (and longest) downturn since the Great Depression.

Technically, though, economists use the word “recovery” (or “expansion”) to refer to the state of the economy after a recession ends. So judging the “recovery” would mean looking at how much the economy has improved since it reached that very deep trough in June 2009, or 38 months ago.

I calculated the percentage change, from business cycle trough to business cycle peak, for a handful of economic indicators in all the previous postwar recessions, and compared those to the track record for the current recovery.

This isn’t an entirely fair comparison, of course, since (hopefully) the economy has not yet peaked and will continue to expand.

Even so, on almost every measure I looked at, there was at least one previous (completed) recovery that performed worse.

Two things: First, why compare just the “recovery”? As we´ll see this may be very misleading. Much more useful to look at the complete cycle (“Peak to Peak”). Second, why go into the “components of spending” detail. That just obfuscates the macro analysis. Look at NGDP (and RGDP).

That´s what I did. The panel selects a few of the post-war cycles. It is clear that what makes the present cycle unique is not the “sluggishness” of the recovery, although that´s true, but the “depth” of the hole into which spending (NGDP) fell from “peak to trough”. Since the charts are in log scale, the vertical distance is a measure of proportional change and no other cycle shows anything that could resemble the spending drop in the present cycle. The “sluggishness” is the result of spending taking two years to regain its previous peak level, also something “unique” to the present cycle.

Scott Sumner has this “companion piece”:

Given that other theories like “policy uncertainty” also require wage stickiness, I’m not really sure what’s gained from moving away from demand-side models.  Bernanke experimented with a historically slow recovery in AD (i.e. NGDP), and he got a historically slow recovery. What else would you expect?

7 thoughts on “It´s all in the framing

  1. Anyone such as myself who is relatively new to central banking issues wants to know: what about the supply side? Over time (with further study), it starts to make sense to us newbies why central banks stick to aggegate demand, for that is hard enough to work with monetarily. Perhaps the problem is that there is no unified counter voice to central banking that could speak for supply side issues in a comprehensible sense. Instead, we have the ideological divisions that see ‘parts of the elephant’ but not the whole animal. Therefore it can be hard for some people to think Fed…oh that’s AD because they don’t see where AD and AS are separated in the larger sense. I can think of no other reason why Bernanke should have to be fumbling and floundering with supply side issues now. It’s as though he had to go back to square one, with people suddenly waking up to the problem, yet seeing it through that same supply-side beginners lens.

    • Becky, the 1973-80 cycle is a good example of “supply-side issues”, following the first oil shock. Although the Fed keeps NGDP growth “steady”, AS shits left so RGDP falls and inflation rises (not shown). In all other instances, NGDP slows going into the recession and then accelerates to pull the economy up. The present cycle is an “anomaly”, given the intensity of the drop in AD!

  2. Marcus, it seems that both oil supply and demographics can go a long way to shift balance in the total framework at various points. During the 1973-80 cycle, we had inflation both from (lower) oil supply and of course the odd counter-action of inflation from increased supply in housing, as baby boomers (such as myself) bought those first homes. Contrast those effects to what we might experience in a few years as new oil supplies come online (including Brazil’s presalt oil). At that time we’ll possibly have more oil than the world ‘needs’ along with overall slowdown in housing at least in the U.S. It certainly seems the world’s oil producers would appreciate more AD before all that oil comes online.

  3. Pingback: It´s all in the framing – Visualizing the depth of the fall « Economics Info

  4. The reason this post 2006 drop is so deep and wide is the huge drop in Net Worth, which is big part of AD but usually ignored … and ignorable in models, because it doesn’t change enough to seem to make any difference. But in the 2006-2008 timeframe it DID change enough, fast enough, to make a big change. Millions who kept their jobs but saw their net worth drop found out they were much less rich than they had thought — and spent less, as is individually appropriate.

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