SEPTEMBER 22, 2010.
A Tale of Two Recoveries
The state of the economy after a year of 'rebound.'
It's official: The Great Recession ended 15 months ago, in June 2009. That was the word Monday from the economists at the National Bureau of Economic Research, the outfit that tracks the U.S. business cycle based on a variety of economic variables.
By their calculations, the downturn that began in December 2007 lasted 18 months, or the longest on record since the 43-month plunge of the Great Depression. On the other hand, the recession was only two months longer than the 16-month downturns of 1973-1975 and 1981-82, the two other most serious post-World War II periods of falling economic growth. The 2007-2009 downturn was painful but not extraordinary in historical context.
What is different about this period is the relative weakness of the economic recovery. As the nearby chart shows, in 1983 the recovery surpassed its previous peak in gross domestic product very rapidly from the recession's trough. Growth rose by 4.5% in 1983, 7.2% in 1984 and 4.1% in 1985, and it kept climbing through the rest of the 1980s. This is the kind of recovery you would expect coming out of a severe recession, since the deeper the trough the steeper the rebound.
This time, even after a year of recovery through June 2010, real GDP remained 1.3% below its previous peak in the fourth quarter of 2007, according to the NBER sages. The current recovery peaked with 5% growth in the last quarter of 2009 but has decelerated in 2010—to 1.6% in the second quarter. This tepid growth, in turn, has contributed to the sorry state of job creation, slow business investment and the overall sense of malaise.
Our readers know the competing explanations for this undeniably disappointing performance. White House economists and liberals say the financial roots of this recession have made the recovery unusually difficult, the fiscal stimulus saved the day, and thus we need more of it. Our view is that hyperkinetic government policies have done more harm than good, leading to uncertainty and higher costs that have undermined business and consumer confidence and slowed the economy's otherwise natural recuperative powers.
Consider this contrast: In 1983, the Reagan cuts in marginal tax rates were finally kicking in, regulatory burdens were falling across the economy, and the Federal Reserve was cutting interest rates. In 2010, taxes are heading up, new regulations are piling up thanks to ObamaCare, et al., and the Fed can't keep interest rates near-zero forever. We think these different policy circumstances are very much related to the different pace of the two recoveries.
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