Policymakers prolonging recession

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By Raymond Keating

During the 1980 presidential campaign, Ronald Reagan said, “Recession is when your neighbor loses his job. Depression is when you lose yours.”

From December 2007 to August of this year, private payrolls declined by 7.7 million. So, millions of people feel like this has been a depression.

Therefore, when the official oracles of recession — the National Bureau of Economic Research — declared on Sept. 20 that the recession ended in June 2009, outcries were heard that this bunch of economists was seriously out of touch with the real world.

It is important to understand what these economists were saying, and what they were not. The NBER statement noted: “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.”

To determine when recessions start and end, the NBER’s Business Cycle Dating Committee evaluates assorted data, including monthly GDP, investment, personal income, payroll and household employment, and hours worked estimates.

Interestingly, the NBER analysis lines up with the more common definition of a recession, i.e., two or more quarters of negative GDP growth. Real GDP growth was negative in five of the six quarters from the beginning of 2008 through the first half of 2009 (growth was barely positive at 0.6 percent in 2008’s second quarter).

Despite many disbelieving that the recession actually ended over a year ago, it still ranked as the longest recession, at 18 months, since the Great Depression, according to NBER. Even that point, however, is debatable, as NBER breaks the January 1980 to November 1982 downturn into two different recessions. If that’s considered one long recession, as many other economists assert, the length was 35 months.

Nonetheless, whether it comes in as the first or second longest post-World War II recession, most of us can agree that the economic recovery over the past 14-plus months still very much feels like a recession.

Growth has been uneven, at best, and job creation nonexistent. The Federal Open Market Committee on Sept. 21, for example, said, “Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months.”

As for the outlook, the FOMC said, “the pace of economic recovery is likely to be modest in the near term.”

It’s important to point out that after deep recessions, the economy in the past usually bounced back robustly. For example, during the four quarters after that steep 1980-1982 downturn, real quarterly GDP growth averaged 7.8 percent. That compares to average real growth of just less than 3 percent in the four quarters coming out of this last recession.

In addition, 14 months after the end of that early ’80s downturn, private payrolls had grown by 3.9 million. Since June of last year, private payrolls were still down by 205,000.

Obviously, no economic downturn is the same. But a glaring difference exists between the public policy initiatives in the early ’80s, and what’s been implemented over the past two-and-a-half years.

In the early 1980s, policy shifted dramatically to broad, deep tax relief and deregulation, with monetary policy tightening to get inflation under control. The result was solid economic and employment growth, along with lower inflation, in both the short run and over the long haul.

This could not stand in starker contrast with what’s been tried recently. Taxes have been increased, with even bigger tax hikes slated for the end of this year. Indeed, looming increases in tax rates on personal income, capital gains, dividends and estates are the exact opposite of what was accomplished in the early 1980s. Regulation has exploded in areas like health care and the financial industry. And the energy sector has been threatened by proposed increases in taxes and regulation, not to mention the deepwater drilling moratorium.

Meanwhile, after the stagflation of the 1970s and very early 1980s, the Federal Reserve got refocused on reining in inflation. Today, the Bernanke Fed has been trying to gin up the economy through unprecedented expansion in the monetary base. That has not worked, and it plants the seeds of worry for future inflation. The FOMC made matters worse on Sept. 21 when it declared that a slight pick-up in inflation was now one of its policy goals. Understanding how easy it is for the Fed to overshoot, serious concerns now lurk about poor growth and higher inflation. That is, the return of stagflation.

So, why does the current recovery still feel like a recession? There’s no mystery. Policymakers have been doing and continue to do all the wrong things.

Keating, chief economist for the Small Business & Entrepreneurship Council, can be reached at rkeating@sbecouncil.org. His new book is titled “Warrior Monk: A Pastor Stephen Grant Novel.”