If you pay attention to economic news, it certainly seems like the sky is crumbling down around us. Just when a glimmer of hope appears on the horizon - last week, the Fed announced that several of its member districts were reporting that their economies were no longer decelerated, but had stabilized to a constant decline - it seems that some new piece of bad news slams us down a little bit more, such as the sharper-than-expected drop in consumer spending in March.
All of this is strange and frightening, especially to someone of my generation. You see, I have lived through two recessions, and I was too young to remember the 1991 contraction. The 2001 recession was so mild, it barely counts. In fact, I could make a good case that only people above the age of 32 can remember a decent recession - the sharp double-dip 1981-1982 recession that was caused, in part, by Volcker slaying the dragon of inflation.
You might say that we've been spoiled by the economic boom of the 1990s and mid 2000s - in fact, according to my macroeconomics textbook, between 1950 and 2001 the average length of an economic expansion was 61 months and the average length of a contraction was 9 months. However, between 1982 and 1991, the expansion lasted 92 months. The 1990s economic expansion, from March 1991 until March 2001, was 120 months; the 2000s expansion, from November 2001 until December 2007, was 73 months. Both were significantly longer than average.
The point? Well, our perception of the economy - which is, in fact, the natural perception of anybody under the age of 30 - is horribly biased. We seem to expect perpetual exponential growth, and we don't expect recessions, which have become so rare that we are actually stunned and startled when one occurs. To be fair, this one is longer than average - exacerbated by the financial problems - and probably scarier than anything that's happened since the 1930s, but we need some perspective both to inform our expectations and to shape our policy beliefs.
To find this perspective, we turn to history. If you examine a graph of real GDP change during the 20th century, you find that before 1980, the economy swings up and down very sharply; before 1950, the economy is all over the place, with some years' growth more than 10 percent and other years' shrinkage more than 7 percent. Looking back at historical data, available from measuringworth.org and the National Bureau of Economic Research, you'll see that the economy is practically bipolar.
From 1870 to 1900, the average length of an expansion was 26 months, and the average length of a recession was 26 months. So from 1870 to 1900, we were in a recession exactly as often as we were in an expansion. Imagine living then! In fact, from 1880 until 1930, recessions were much longer - on average, 21 months, versus 26 months for expansions - and much sharper than they are now. A quick examination of annual data for the 1800s reveals that on at least two occasions, GDP fell 10% over a contraction. This hasn't happened since the Great Depression, when annual GDP fell 27 percent.
Why has life been easier since the 1950s? The answer is chiefly because of government intervention: the construction of systems called "automatic stabilizers," such as unemployment insurance, which act automatically to counteract the effects of economic contractions, and active government intervention with fiscal and monetary expansions.
But this is unnatural, so to speak: basic economic theory tells us that the economy is a complex, dynamic system with many feedback loops acting at once. It is consequently naturally bipolar. We would do well to keep this in mind when we are contemplating the current recession: the economy is always oscillating around its long-run growth path. In other words, the sky naturally falls every few years.
Write to Neil at necoleman@bsu.edu
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