One critical way of guaging the severity of a recession, the impact of policy and the changing circumstances of the gobal economy is to examine the behaviour of unemployment during and after a recession. Fortunately we have excellent monthly data available for this from the U.S. Bureau of Labour Statistics going all the way back to 1948. In the case of the depression of the 1930s there is annual data available from the Historical Statistics of the United States edited by Susan Carter et all published in 2006 by Cambridge university press. What we shall compare is the peak of unemployment in each recession and the position of the same statistic 45 months later. I am selecting 45 months as the basis of comparison because in this recession which began at the end of 2007 unemployed peaked in December 2009 at 10 % exactly 45 months ago. The rate is now 7.8 % as of September 2012. It has fallen by 22 % over the past 45 months. How does that compare with previous experience over the past 80 years ? What can this tell us about the severity of the recession ?
Have a look at the following table. Except for the great depression of the 1930s where the data set is annual all the data is monthly data.
recession date for peak of unemployment unemployment peak rate %decline 45 months later
1933 24.9% 23.6%(after 5 years;after 4
1949 October 7.9% 67.1 %(2.6 % unemployment)
1961 May 7.1% 28.2%(5.1% unemployment)
1975 May 9.0% 34.4 %(5.9% unemployment)
1982 December 10.8% 35.2%(7.0%unemployment)
1992 June 7.8 % 29.4 %(5.5% unemployment)
2003 June 6.3 % 30.2%
(4.4 % unemployment)
2009 December 10.0% 22% (7.8% unmpl)
The results are very interesting. They suggest that this recession also accompanied by widespread global financial failure and a major stock market crash ranks as the second most severe of the last 80 years. Unemployment peaked at 10 % below the peak of only two other recessions, the great depression of the 1930s when unemployment peaked at 24.9 % in 1933 and the deep recession of the early 1980s when unemployment peaked at 10.8 %. The reduction in unemployment after 45 months is also closest to the reduction of the rate by 23.6 % in 1938 five years after its peak in 1933.
The reduction is the smallest of all the eight recessions included in the table.
Does that mean that policy has been misguided ? No because the severity of this crisis has been underestimated by many people . As a consequence although the stimulus policy was and remains correct its size was smaller than it should have been in part because of errors made by the President’s economic advisors but also in large measure because of the obstruction in congress by Republicans and perhaps initially some conservative Democrats hostile to Keynesian ideas who refused to pass a larger stimulus or later by Republicans solely an expansion of the original stimulus. The unemployment rate will continue to drop as both manufacturing and the housing market begins to recover(the latest data are promising).
But all those who remain hawks on deficit reduction should look at this data and understand the dangers of excessive zeal for a balanced budget until such time as the economy has healed and unemployment has dropped to pre-recession lows. Critics of the President should understand that the rise in unemployment to its peak is a situation that resulted from the crisis that got underway in 2007 and whose roots were laid in the decade preceding. One cannot fairly blame him for a situation he inherited from previous administrations. And in any case business cycles driven by technology, demography, structural issues, financial speculation and growth dynamics have minds of their own. They do not follow political ideology. But how one treats them through policy can be affected by ideology rather than preferably rational scientific inquiry.