Tuesday, September 01, 2009

Reference cycles 

Allan Meltzer, whose second volume of the History of the Federal Reserve is due out in November (Book 1) and December (Book 2) -- and please, get them on my Kindle?!? -- says something I've said for awhile: this recession really isn't that much different from the recessions of my youth, and is very different from the Great Depression:

The facts we face today are very different than the grim reality Americans confronted between 1929 and 1932. True, this recession is not over. But it would have to get improbably worse before it came close to the 42-month duration of the Great Depression, or the 25% unemployment rate in 1932. Then, the only safety net was the soup line.

The current recession is also much less severe than the 1937-38 Depression. A more accurate comparison is to the 1973-75 recession. Today's recession is as deep and most likely won't be much longer than the one we experienced some three decades ago. By pointing this out, I do not intend to minimize the damage that the economic crisis has had on individuals and businesses. But as policy makers make decisions in order to alleviate the recession, they are not helped when economists overstate its severity.

The table nearby compares the current recession, the 1937-38 depression and some past severe postwar recessions. If the recession ends this summer�as many experts predict�the record will show that it was not very different from other postwar recessions, but very different from the 1937-38 and 1929-32 Depressions.

Why is this important? In the 1973-75 case the answers given by the government (Nixon/Ford) and the Fed (Arthur Burns) were a combination of "we're all Keynesians now" and the disastrous wage and price controls and incomes policies (culminating in Whip Inflation Now buttons.) The 1981-82 period was the Volcker disinflation, Reagan tax cuts, etc.

Which worked out well? Which worked out poorly? And which does current policy remind you of more? Maybe more than students of the Great Depression, we need policymakers who are students of the 1970s.

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