History lesson: Recessions are modern

Interesting just in its own right, this paragraph from Paul Krugman:

“… the 19th-century economy had much more flexible prices and wages than later came to be the case — not, primarily, because of different institutions, but because it was still largely an economy of small, self-employed farmers. More than half of US workers were in agriculture up until the 1880s. Peter Temin has told me — I can’t find it in a quick search — that the United States didn’t start having modern recessions, with large declines in real GDP, until the Panic of 1873; Britain started having them much earlier, because it became an industrial economy earlier.”

Or possibly not even until the Panic of 1893, which at the time was known as the Great Depression.  Some economic history research that I have not seen, but which is cited confidently in this compelling column by Charles R. Morris, concludes that the 1870s contraction was actually quite mild.

Which is not to see that genuine and widely felt “hard times” never occurred in our pre-industrial, pre-1870 economy.  Financial panics and deflations were common, and any big drop in farm price surely hurt the real incomes of many farmers, as long as their prices fell more than other prices and farmers had nominally denominated debts.  Many economic historians have even said that a “depression” in the early 1770s helped set the stage for the American Revolution.  But it does seem we need to have a better understanding of what those early “hard times” were like for the people who experienced them.

Just words

This week’s news from the Commerce Department is that real GDP grew at a 3.5% annualized rate in the 3rd quarter of 2009, which is the best quarterly growth rate in two years.  And some economists, including the National Bureau of Economic Research’s (NBER’s) Jeffrey Frankel, are saying the recession probably ended sometime this summer.  Meanwhile, a poll of MSNBC readers finds that 82% think the recession is still raging, 9% think the economists are right, and 9% don’t know.  (Yes, online polls are unscientific, but earlier, professional surveys I’ve seen of the public also found them to be more pessimistic about the economy than the experts.)

Are the economists that obtuse, or is the public that dumb?  Even if one’s preferred is answer is “Both,” I think the split is due to two different definitions of “recession.”  The NBER and the economics profession define a recession as a general period of economic decline, whereas I bet most people define it as a weaker-than-usual economy.  I would argue for throwing the word out altogether when discussing the economy.

• Use “contraction” to denote a period of actual decline, just as the 1929-33 collapse was called the Great Contraction.
• Use “depression” to denote a period of economic weakness, just as 1929-early 1941 was the Great Depression.  I argued in March that we were in a depression, but if “depression” sounds too harsh because people associate it with the Great Depression, then say “slump.”

Right now, the different professional and public definitions of “recession” (just as with “money” and “investment”) just makes economists seem that much more out of touch.

Stabilizing or flatlining?

Among the latest signs of recovery are positive GDP growth rates for Germany and France in the second quarter of this year.  The media, apparently tired of reporting bad news, are trumpeting this as sensational news, which it really isn’t.

Both of those countries saw real GDP growth of 0.3% (or about 1.2% annualized), which is better than negative, but less than half of what normal GDP growth looks like. (The average for the last 30 years is 2.9% per year.) And in a real, robust recovery the economy is supposed to grow faster than normal; it has to, to get back to its potential. If GDP in those two countries had fallen by 0.1%, they would still be considered to be in recession — should so much importance be attached to a difference of 0.4% in a three-month period?

It’s a depression. You heard it here first.

I’m not being alarmist.  It’s worth noting that before the 1930s “depression” was the standard term for a substantial economic contraction, what would now be called a recession.  The 1930s depression was termed “great” because it was indeed the worst ever, so bad that it became a proper noun, the Great Depression.  Some are calling today’s slump the Great Recession, which is a waste of keystrokes.

I remember my father calling the 1982 recession a depression, and I think he was right:  the worst slump since World War II, 10% unemployment (peaking at 10.8%), including the permanent loss of millions of industrial jobs.

Now consider the evidence for the current one:

$6 billion pile-up

Real GDP kind of did fall 5% last quarter, just as consensus forecasts had it and worse than the official drop of 3.8%.  This story’s a couple weeks old (been busy), but just as the latest unemployment numbers are much worse than they look, the fact that the actual (annualized) drop was “only” 3.8% is actually a sign of weakness, not strength. The NYT and other sources noted that a big reason for the discrepancy was a surprise increase in unsold inventories.

What struck me was the item in the Commerce Department news release that showed that the inventory pile-up actually accounted for all of the discrepancy.  It was 1.3% percent of GDP, i.e., the entire difference between the 3.8% drop in GDP, and the 5.1% drop in “real final sales of domestic product.”

College, credit, crunch

A recession should tip the scales in favor of attending college, yes?  It’s part of every Econ 101 course:  the opportunity cost of attending college includes the income you’d making at whatever job you’d be working at otherwise.  So as career opportunities fail to knock, college or grad school looks like a much better option, yes?

Well sure, except you still have to pay for it.  And that seems to be a lot harder than it was a year or two ago.  And that’s apart from the smaller pool of savings for college, thanks to the $6.9 trillion lost in the U.S. stock market in 2008 and the 1.9 million jobs lost in 2008.  I’m thinking in particular of the tightening of the markets for student loans and credit cards.  Colleges and credit card companies have had something of a symbiotic relationship for years, as this New York Times article describes.

Excessive credit card debt seems to have been a major part of the bubble that just burst (and may still have some bursting to go), so it might not even be a good thing if banks were to relax their current credit-card standards.  But a broadening of federal student loan and grant programs might be a sensible investment in human capital, as part of the forthcoming stimulus package.