Kurt Brouwer September 10th, 2009
There have been lots of claims that this was the worst recession since the Great Depression. As a loyal and frequent reader of Fundmasteryblog you know better of course.
The correct answer is that this is not even close to the worst since the Depression. Here is a new chart from blogger and economist Donald Marron:
Source: Donald Marron
As you can see, this downturn is not close to the 1945-47 decline so it is definitely not the worst since the 1930s. You could fairly say that this is the worst recession since the aftermath of World War II, but even that still overstates things a bit because the GDP decline was more than three times deeper than this time around.
Back in March, we wrote this:
GDP: Great Depression vs. Current Recession
To start this comparison, here is a chart from the wonderful Calculated Risk blog that shows how far GDP has declined in this recession versus that the cataclysmic decline during the Great Depression:
Source: Calculated Risk
Calculated Risk had this to say about the chart [emphasis added]:
What is a depression? (Calculated Risk, March 10, 2009)
"¦The Great Depression saw real GDP decline 26.5%.
The post-WWII recession lasted 8 months and saw real GDP decline 13%. This decline in GDP was due to winding down the war effort - something that was celebrated - and is excluded when analysts call the current slump the "worst since the Great Depression"…
This point about the post-World War II recession is a good one that is often overlooked. It was sharp and severe as our war effort wound down and millions of men and women returned from the war. It was a deep recession that is largely ignored in all the media hype about this being the worst downturn since the Depression.
Just the facts please
All this talk of the Great Depression is interesting and informative, but also not very accurate when you look at the facts.
Via: The Corner
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The unemployment rate in the 1945-1947 recession reached a high of 3.9%. It was a recession in terms of GDP only, and remember the nation was shifting down from a huge wartime economy to a peacetime economy. I’ve always maintained that declines in GDP from peak are not nearly as important as the output gap and the gap between unemployment and natural unemployment or NAIRU in defining the severity of a recession. By both measurements this is clearly the worst recession since the Great Depression.
The previous peak post Great Depression peak in the output gap occured in the fourth quarter of 1982 and was 7.4%. We surpassed that record in the second quarter at 7.5% according to the CEA. Since NAIRU was 6.0% in 1982 and peak unemployment (November and December) was 10.8% the difference then was 4.8%. Similarly since NAIRU is currently 4.8% and unemployment was 9.7% in August the difference was 4.9% by this measure we have surpassed the 1981-1982 recession by that measure as well.
One might go still further and consider the duration of the output gap. In other words one could calculate percentage-output-gap-years, or the area between actual output and potential with potential normalized to unity. To my knowledge, nobody has attempted that so far.
Recently I decided to put my money where my mouth is and calculate percentage-output gap-years. data for real GDP comes from the BEA of course. Data for potential real GDP comes from the CBO. The major problem is of course that the BEA has recently considerably revised recent GDP figures but the CBO has yet to follow up.
The 1980-1982 recessions fell into an output gap in the first quarter of 1980 and stayed there through the third quarter of 1987. The total output gap was approximately 18.2% of potential annual GDP (a post Great Depression record).
If one assumes that GDP equaled potential GDP in the fourth quarter of 2007 and then assumes growth in potential GDP similar to previous CBO projections from that point on one finds the following. The total output gap so far is approximately 5.8% of annual GDP. Thus it ranks in fourth place after the 1980-1982 recessions, the 1990-1991 recession (7.9%) and the 1974-1975 recession (7.4%) in that order (so far). (Interestingly although the 1990-1991 recession was not sharp, due to the slowness of the recovery it ranks second by this measure.)
Since it we are only six quarters into this recession it might be a better comparison to look at the other recessions at that point. Six quarters into the “1980-1982 recession” we had a total output gap of only 2.5% of annual potential GDP. The worst, after the current recession, was actually the 1974-1975 recession at 4.8% of potential annual GDP. The third worst was the 1990-1991 recession at 3.8% of potential annual GDP. So at the six quarter point, this is the worst post Great Depression recession, by the percent-output-gap-years measure.
Mark — When I see one of your lengthy comments, I know I’m going to learn something. I also know that your findings are almost certainly going to lead to a different conclusion than mine.
One problem with your formulation is the level of NAIRU (the lowest level of unemployment consistent with not triggering inflation). I remember back in the 1990s, Paul Krugman pegged that number at about 6%.
I will have to take a look at your output gap statistics. My point stands though. Most commentators think of recession in terms of GDP decline. And, though that may be too narrow for you, it is still clear that this recession is not even close to the Great Depression in terms of GDP decline. Further, while I grant that the 1945-47 downturn was due to the changeover from WWII, it was still far more severe than this one. So, this is not the worst recession — in GDP terms — since the Depression.
Kurt You wrote: “And, though that may be too narrow for you, it is still clear that this recession is not even close to the Great Depression in terms of GDP decline.”
Nor is it close to the Great Depression by the standards that I suggested. There was no NAIRU then but if we had to guess it was probably 4.5%. Thus the gap between unemployment and the natural rate was probably about 18%. And we don’t have “official” estimates for potential GDP but it’s probably fair to say that the output gap reached a peak of about one third of potential in 1933. And as far as my suggested-potential-output-gap years criterion, I estimate that the Great Depression resulted in a loss of output equal to about 80% of annual GDP.
But the 1945-1947 recession didn’t amount to much if anything in terms of these criteria. We went from producing tanks, bombers and aircraft carriers on a truly massive scale to producing wide lapeled suits, Chevy Fleetmaster Station Wagons and Levittown tract houses. Very few people found it hard to find a job and many, many women traded in playing Rosie the Riviter for being a stay at home mom with a small posse of children. There’s simply no comparison with that and our current situation.
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