Article URL: http://www.slate.com/id/2190516/
How Bad Could It Get?
Will the recession be more like the 1990-'91 downturn or the Great
Depression?
By James Ledbetter
Posted Friday, May 2, 2008, at 5:06 PM ET
The question of whether the U.S. economy is in a recession is, at this
point, a matter of decimal points. Since the population grows faster
than 1 percent, anyway, Wednesday's announcement of a 0.6 percent rise
in gross domestic product for the first quarter is functionally a drop.
The real question now is: How bad could it get? Are we facing another
version of the brief recession of 1990-'91, which, as James Fallows once
memorably wrote, "was over by the time it was identified"? Or are we
going to be wearing barrels for clothes and burning Ikea furniture to
heat our homes, in a rerun of the Great Depression?
No one knows. But we may be able to arrive at a rough answer if we break
the question down. How, exactly, do Americans distinguish a bad
recession from a mild one—and using those yardsticks, can we at least
make reasonable predictions about this one?
Here are three ways of measuring recessions.
Duration. This is a biggie, especially in terms of how history will
remember the current downturn. What we think of as the Great Depression
(which was actually two deep recessions separated by a few years of
technical growth) is seared into the national memory in part because it
lasted so long. The first phase—between August 1929 and March 1933—was
nearly four solid years of declining gross national product. Many
countries would find it hard to sustain such doldrums without revolution
or war, and the United States has experienced only one worse downturn
since reliable records have been kept—a five-and-a-half-year hell
between 1873 and 1879. (A list of historic business cycle expansions and
contractions can be found here.)
Could our current downturn last that long? The National Bureau of
Economic Research is the body that "officially" declares a recession,
and it's not yet done so because growth numbers haven't been negative
(at least, not until they're revised). But Martin Feldstein, the
economist who heads the NBER, said in early April that he personally
believes that we're already in a recession and that it could last about
twice the eight-month duration of the last two recessions ('90-'91 and
March-November 2001).
It's not hard to find economists with darker scenarios. Still,
Feldstein's 16-month estimate is hardly Pollyanna-ish: It would make
this recession a tie for the longest since the Depression. But that's
another way of saying that recessions have been getting shorter. The
average economic contraction since World War II has been 10 months and
the average expansion 57 months. Both figures are much friendlier than
historic norms and suggest that policymakers and other economic actors
have gotten significantly better at managing the business cycle.
And remember: If Feldstein is right, then we've already been through six
months of shrinkage, so only another 10 or so to go. Not a reason to
cheer—but also not a reason to panic.
Joblessness. The age-old joke says that it's a recession when your
neighbor loses her job and a depression when you lose yours. The joke
contains a kernel of economic truth: The Great Depression involved
massive job losses that affected nearly every American family. At one
point during that 43-month ordeal between 1929 and 1933, one in every
four working Americans was unemployed. Every significant industry cut
jobs, and entire towns and regions—at least in economic terms—were wiped
off the map.
It's never been that bad since. In the 1981-'82 downturn, the
unemployment rate hit nearly 11 percent, but the postwar norm has been
single digits. (The April rate is 5 percent, down from 5.1 percent in
March.) True, unemployment is generally considered a "lagging
indicator," meaning that if we're in a recession now, we may not yet
have seen the worst of job losses. Moreover, critics say that the
official definition of unemployed would be larger if it included people
who work part-time but can't find full-time work, the substantial U.S.
prison population, and so on.
But no one would dispute that the American economy is more dynamic and
resilient than it was in the '30s. The overwhelming majority of workers
in those days toiled in either manufacturing or agriculture, sectors
that are especially vulnerable to bust cycles. The employment market has
diversified, workers have better skills, and global trade is much more
important. So, if this recession leads to increases in unemployment—as
it almost certainly will—not all job sectors will be uniformly hit.
(Even in the severe '81-'82 recession, only 72 percent of U.S.
industries experienced declining employment, compared with 100 percent
during the Depression.) Wages may well flatten or shrink—as they've been
doing for years—but it's difficult to find a credible scenario in which
U.S. unemployment is going to hit 10 percent in the next 18 months.
Depth. The recession between 1973 and 1975 was punishing. Then as now,
rising fuel costs led to inflation (more than 12 percent in 1974). An
unprecedented wage and price freeze imposed by the Nixon administration
did not stem the problem. Gasoline was rationed, and unemployment rose
as high as 9 percent.
Yet for all that, the actual drop in gross national product, according
to research by late economic historian Geoffrey Moore, was just under 5
percent. By that measure, '73-'75 was the worst recession since the
Depression. The inflation-adjusted gross domestic product (as it is now
called) has shrunk only in two brief periods since—in the early '80s and
the early '90s, in both cases by less than 3 percent.
So, let's say this recession gets as bad as the one in '73-'75. The 2007
gross domestic product in current dollars is more than $13.8 trillion. A
5 percent hit this year would take the economy to $13.1 trillion, or a
little less than what it was in 2005. Based on growth patterns that have
been quite steady since 1939, we'd be back at $13.8 trillion by 2009.
Undesirable, but not catastrophic.
Is this an argument for complacency? No. There are lots of important
unpredictables, including what happens in the rest of the world and the
ability of the financial sector to steady itself. The mortgage crisis
and the decline in housing prices are not over. There's also no obvious
path for getting out of the current rut. Recent recessions have not
resolved themselves without a catalyst, like the tech boom of the '90s
or the housing boom of the '00s (both of which eventually brought on
their own crashes). Moreover, if the modern recession is relatively
modest, so, unfortunately, is the modern recovery. Expansions may last
long, but if the snapback from the 2001 recession is any guide, we're
unlikely to see bursts of domestic hiring or big pay hikes once things
pick up.
James Ledbetter is the editor of The Big Money, Slate's business site,
which will launch later this year.
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