The Current Economic Recession: How Long, How Deep, and How Different From the Past?

On November 26, 2001, the National Bureau of Economic Research, the nonpartisan and nonprofit organization that dates the business cycle for the United States, decided that the longest economic expansion in U.S. history had come to an end in March of 2001. The U.S. is now in a recession. This dating decision by the NBER is unusual in the sense that at the beginning of the recession, the economy was still growing, albeit at a very slow rate. The onset of other recessions in the post- World War II era are typically marked by a contraction in gross domestic product (GDP), our basic measure of economic activity. In fact, it became a simple rule-of- thumb to declare that the economy was in a recession whenever there were two consecutive quarters in which GDP contracted.1 The cover of the December 3, 2001 issue of the New Republic magazine read "Why This Recession Is Different." The cover article captured a sentiment expressed by recent articles in many different publications when it stated: So despite the stream of bad economic news, economists were confident that Greenspan's rate cuts would work their magic soon enough.... If this recession is like every other American recession since World War II, that optimism is fully merited. The problem is that there's mounting evidence it's not. This time around it wasn't a change in consumer spending that brought the economy to a standstill; it was largely a change in business spending.... Cutting interest rates in the middle of this type of economic slowdown, as Greenspan did this year, won't help much.... In other words, economists' current faith in monetary policy has a lot to do with the kinds of recessions we've seen in the past and little to do with the recession we're in now.2 If this recession is dissimilar from other post-war recessions, to what can it be compared? Some commentators believe it has more in common with recessions of the 19th century and early 20th century. For example, The Economist magazine recently paraphrased an argument of Goldman Sachs economists that Greater vigilance from central banks, industrial deregulation, and ample productive capacity (as a result of strong investment) have all helped to hold down inflation. The traditional trigger of recession, therefore, has not been pulled.... As a result, the expansion has endured for longer than usual. The snag is that longer periods of expansion allow other sorts of imbalance - notably, personal and corporate debt, and overinvestment - to build up instead.... Eventually, overinvestment reduces the return on capital and firms decide to cut their spending on capital. Consumers feel overburdened with debt and increase their saving. Optimism gives way to pessimism and demand falls sharply. In the 19 th and early 20 th centuries, in fact, this was the typical business-cycle pattern.... This old fashioned kind of recession may in general tend to be longer-lived, as well as deeper, than the ordinary post-war sort.3 The performance of the American economy is important to the government in its ability to accomplish its domestic and foreign objectives. High among these objectives is full employment. If the quoted arguments are correct, then Congress may need to take steps beyond those taken in recent recessions to revive the economy. This report will examine the historical record more closely to judge the validity of these arguments. It first examines the current recession, then explores economic theories about the causes of recessions, and then compares historical recessions to the current one. It concludes that upon careful examination, the current recession is not unusual after all.download