This is a great chart put together by Mark Perry of the
Carpe Diem blog. The unemployment rate today is almost as bad as it was in the early 1980s, but by many other standards this recession has been a far less problematic. Double-digit inflation and interest rates in the early 1980s presented a huge challenge to the economy, yet we survived. See Mark's comments on the subject
here.
This comment has been removed by the author.
ReplyDeleteIf it was much worse in the 80's, then why have the current interventions been exponentially greater?
ReplyDeleteScott,
ReplyDeleteDo you think some of the recent disappointing economic data suggests the recovery will be weak at best?
How true!
ReplyDeleteRemember 21% mortgages . Nothing was selling. Seems like the 21% mortgage rate gave rise the “land contract” home sale.
Certificates of Deposits were yielding 15% or higher and banks had posters in their front windows advertising the high interest rates. Many people would buy 3 month CD’s as they figured the renewal rate would be even higher in 3 months.
Prices were rising so fast (this was before bar code pricing) you could pick up an item and peal off the price tags, which were three or four deep in some cases, and find the prior prices.
Many pockets of 20%+ unemployment.
It was truly an ugly situation.
Bill: I haven't seen any really disappointing economic data. Data is always irregular, almost always up and down from one month to the next. What I see is the normal kind of oscillation that occurs during a trend.
ReplyDeleteBut I have said that I think this recovery will be relatively weak, and I continue to believe that. It will nevertheless be a V-shaped recovery, and we are likely to see growth rates of 3-4%. But if this were the typical recovery from the sharp and deep recession that we have had, we would expect to see growth rates of 5-6% for several years.
The recovery will not be as strong as it could be if fiscal policy had been applied in a more supply-side manner.
Scott,
ReplyDeleteDo you see a major stock market correction coming? I saw one blogger (Postcards from Capetown) who believes it will go back down to 8000 based on expected future corporate profits. He also sees some evidence of a W or double dip recession based on the idea that the uptick is really all based on fiscal policy.
Two major differences that have yet to play out.
ReplyDelete1) In the 80's, if you either needed a loan and/or you were stupid enough to secure one, you could get it.
2) In the 80's, when the economy finally picked up, you had a job to go to. Where are the jobs now?
And, it is only a matter of time until the economy again sees double digit inflation and interest. How else can the borrower (government of the US-taxpayer) pay off its loan to itself (US-taxpayer’s savings account; US-treasury)? We now have unprecedented debt coupled with a political will and drive to add to it - substantially.
Perhaps we will survive but we will not return to the excesses of the 90's and 00's. Our standard of living is going to see a major negative correction.
When desirable negative interest rates are unrealizably negative for several asset classes this is most certainly not better than the 1980s. How do we attain a faster rate of growth when interest rate policy has attained the zero interest rate lower bound?
ReplyDeleteAnd as for pockets of 20% unemployment where do you want to begin right now?: the San Joaquin Valley?, central Oregon?, instate Alaska?, The Upper Peninsula of Michigan?, Southeastern Ohio?, The trisate area of Louisiana, Arkansas and Mississippi?
Bill: I really don't think the economy's upturn has much to do with fiscal policy. Indeed, I've said many times that I think fiscal policy is actually hurting the economy's ability to grow; we have a recovery in spite of faux fiscal stimulus. I think the recovery is a natural recovery after a recession that was mostly caused by a terrible shock to confidence in the banking system. I don't see any signs of a double-dip recession out there.
ReplyDeleteMark: I think you assign way too much power to monetary policy. Monetary policy cannot be used to create real growth out of nothing but the printing press. Monetary policy can foster growth by keeping the value of the currency strong and stable, but it cannot manufacture growth at will. What the Fed has done by expanding the monetary base by several orders of magnitude should do just as good a job as negative interest rates in time. All the signs I see tell me that the Fed has fully offset the huge increase in money demand that occurred last year. Job done. Now they should be reversing that and raising interest rates.
ReplyDeleteThe economy is recovering, and unemployment will gradually come down over time.
Public (If it was much worse in the 80's, then why have the current interventions been exponentially greater?): Very good point. Certainly any comparison of this recession with past recessions is going to be imperfect, especially with this one, since it culminated in the near-collapse of the world's banking system, a sudden and massive loss of confidence, and an almost unprecedented surge in money demand.
ReplyDeleteI think the Fed's monetary intervention was largely justified by the nature of the crisis itself; both were unprecedented. But the fiscal intervention was highly questionable. I don't think anyone will be able to look back and say that the fiscal stimulus packages that were rammed through Congress did anybody any good. They most likely just made things worse, since they created the real risk of massive tax increases and a huge expansion of government power.
Why was the fiscal response so outrageous? Because Obama and Rahm saw an opportunity to exploit the crisis in order to achieve their political goals.
this was an inflationary recession. this time it is deflationary. after the stock market hits 11k or so,
ReplyDeleteit will grind down to 4000.
Scott,
ReplyDeleteSimply expanding the monetary base is not the same as reducing the fed funds interest rate. In fact according to Jan Hatzius of Goldman-Sachs it takes $1.3 trillion of expanded monetary base to equal a one percent reduction in the federal funds rate. All the signs tell me that the Federal Reserve has fallen far short in satisfying the the huge increase in money demand this year.
The economy is recovering. The labor market will take much much longer.
P.S. If in case it isn't clear increased inflation is many years away.
Hatzius' estimation means nothing to me. We've never seen conditions like this, so it's anybody's guess. His guess is as good as mine, and both are worth very little.
ReplyDeleteBut if the Fed has fallen short of supplying money to meet the increased demand for it, then we should see lots of obvious signs: the dollar would be rising, gold would be falling, commodities would be falling, the economy wouldn't be picking up, credit spreads would be widening. Obviously we see the just opposite.
Scott,
ReplyDeleteI see a few more months of rising unemployment, and at least one more quarter of an increasing output gap. As for dollar I'll tell you in October because September is always a bad month for the dollar. And as for inflation, forget about it (at least for now).