A Short History of American Panics, Recessions, Depressions: Why Conservative Economics Can't Work - Part 3 [263]

WHY WE DON'T WANT RECESSIONS

Source

When Is A Recession Really Over

LIKE MOST THINGS IN LIFE ... IT DEPENDS. It depends on a lot of things, not the least of which is "what kind of recession is it?" You see, the dynamics of what starts a recession determines its longevity; which may or may not coincide with the "official" duration from the National Bureau of Economic Research (NBER).

Another complexity is "how do you measure recovery?" When do you actually know when the effect of downturn is truly over? There are, of course, many different measures where different ones are more appropriate than others at different times. For example, the NBER generally uses the switch from a declining GDP to one that is growing as their endpoint. But, is that necessarily a good measure for this recession or that recession? Again, it depends on the recession.

The Great Depression officially ended in March 1933, but who knew? I could argue it didn't end until WW II and be able to support it with statistics such employment which never did return to normal or that it took over 16 years for the number of banks to increase to pre-depression levels. There are other statistics as well such as the Wholesale Price Index, the Retail Index, the Cost of Living (now CPI) Index, GDP per capita, among others. Another example using these metrics was the 1865 depression. In this case, the depressions duration was 3 years, yet it took 7 years for the per capita GDP to return to pre-depression levels, 50 years for the Wholesale Price Index to recover, and 48 years for the Cost of Living Index to "bounce" back. So, take your pick.

The point is, of course, to make an informed assessment and not just a bumper sticker or throw-away line, you must consider multiple metrics of improvement, not just GDP. So. in Table 1 you will find several of these metrics for each recession. Note that not all recessions have all metrics because some metrics aren't available for the whole period.

MAJOR RECESSION RECOVERY PERIODS

CONTINUOUS DOWNTURN
DEPTH (largest GPD/Capita Decline
OFFICIAL DURATION (Yrs)
RECOVERY - GDP*
RECOVERY - WPI
RECOVERY - COLI (CPI)
Plus RECOVERY - RI
Plus RECOVERY - # BANKS
1796 - 1799
1.0%
3
2
17
 
 
 
1802 - 1804
1.4%
2
3
11
10
 
 
1807 - 1809
6%
3
3
2
1
 
 
1815 - 1821
3.8%
6
7
49
132
 
 
1828 - 1829
1.7%
1
3
24
9
 
 
1833 - 1842
3.8%
10
11
30
36
 
 
1853 - 1854
0.2%
2
2
1
1
 
1
1857 - 1858
2.2%
2
3
6
5
 
 
1865 - 1867
7.6%
3
7
53
55
3
5
1873 - 1877
2.5%
5
4
44
53
7+
8
1882 - 1885
6.1%
3
5
34
43
 
1
1893 - 1894
6.7%
2
2
7
15
8
1
1907
12.5%
1
9
2
5
1
1
1913 - 1914
9.4%
2
3
3
1
 
 
1920 - 1921
4.2%
2
3
29
27
1
23+
1929 - 1939
28.6%
4
10
13
14
 
16+
1937 - 1938
4.4%
2
2
4
3
 
 
1960 - 1961
0.9%
2
3
5
1
 
 
1973 - 1975
2.6%
3
3
1
1
 
 
1979 - 1982
2.7%
4
4
1
1
 
 
2008 - 2009
3.6%
2
4
3
2
 
 
TABLE 1 - TIME IS IN MONTHS AND THE RECESSIONS THAT ARE BOLDED ARE FINANCIALLY-BASED, i.e. LACK OF FINANCIAL REGULATIONS, EASY CREDIT, SPECULATION, ASSET BUBBLES, THEN A TRIGGER.

* - GDP is actually GDP per Capita. Because population was growing so rapidly for the first 120 years of America's history, it distorts raw GDP, even when expressed in constant dollars. Dividing by population has the effect of normalizing GDP for population growth.

WPI is the Wholesale Price Index. The Wholesale price index refers to a mix of agricultural and industrial goods at various stages of production and distribution, including import duties. The Laspeyres formula is generally used. The index is calibrated to a given year, say 2005 = 100.

COLI, or Cost of Living Index, is a broad, theoretical measure of the effects of inflation on standard of living. The version used is a somewhat narrower facsimile, the Consumer Price Index - U (CPI-U), which measures price changes for all urban consumers. CPI-Us prior to 1913 are estimates made by the Federal Reserve Bank of Minneapolis.

RI, or Retail Index, is similar to the WPI in that it measures price changes at the retail level. Currently, the data availability is spotty.

# of Banks - One of the characteristics of strong economic downturns is the collapse of banks, especially before FDIC in the 1930s. A measure of the recessions severity is the percentage loss in banks coupled with a return to the previous level of banks.

Significance

ONE QUESTION THAT COMES TO MIND is whether there is a significant difference between the average durations of recessions based on financial reasons, e,g. 2008; or based on some other reason like the end of a war. To that end, let's look at a couple of averages from Table 1.

Financial Vs non-Financial Recessions

 
OFFICIAL DURATION
PER CAPITA GDP DURATION
WHOLESALE INDEX DURATION
COST OF LIVING INDEX (CPI-U)
FINANCIALLY-BASED
3.7 years
5.5 years
13.5 years
10.9 years
NON-FINANCIALLY-BASED
2.5 years
3.2 years
19.1 years
30.6 years
 
Not Different at Alpha = 0.05
Different at Alpha = 0.05
Not Different at Alpha = 0.05
Not Different at Alpha = 0.05
 
Different at Alpha = 0.1
 
Not Different at Alpha = 0.1
Not Different at Alpha = 0.1
TABLE 2

The data set used consists of 10 financially-based recessions and 11 other type recessions; not particularly large. The hypothesis we are testing is whether there is a difference in means between the two sets of data. Using the two-tailed t-test, we see that, at the most commonly used level of significance of 5%, there is not a statistically significant difference between the two means when considering the "official" duration, the recovery time for the Wholesale Price Index, or the time it takes the CPI-U to begin to increase again. There is, however, a difference for "official" durations if we loosen our standard a bit to Alpha = 10%; but not for the WPI (the reason is the huge variances in durations).

There is, nevertheless, a significant difference at the 5% level between the mean recovery times (to reach pre-recession levels) for the metric, per Capita GDP.

The reason the WPI and COLI do not show up as significant (they might not anyway) is that the population is small and the variation of individual data points around the mean is very large. As such, I would have been very surprised if the null hypothesis had been disproved.

 
PERIOD
TOTAL YEARS
TOTAL RECESSIONS*
RATE of TOTAL RECESSIONS
FINANCIALLY-BASED RECESSIONS**
RATE of FINANCIAL RECESSIONS
Avg GDP Length of "OTHER" Recession
Avg GDP Length of FINANCIAL Recession
CLASSICAL ECONOMICS
1796 - 1933, 2000 - 2009
146
37
1 Every 4 Years
11
1 Every 13.7 Years***
3.2 Years
6 Years
KEYNESIAN-BASED ECONOMICS
1933 - 2000
69
12
1 Every 5.8 Years
0
Haven't Had One
.3 Years
4 Years
Total Recessions Based on NBER
 
 
49
 
11
 
 
 
TABLE 3

* - Includes all recessions listed by the NBER, not just the ones analyzed previously

** - Based on the descriptions offered at http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

*** - Excluding the Great 2008 Recession

It is a given that those who hold by Classical economic theory and the laissez-faire policy that is central to it believe very strongly it has never failed them. In fact, Table 3 should make it painfully obvious that Classical economics has always failed in the mid- to long-term. During the 146 years during which Classical economics was America's economic policy (save for maybe a totally of 10 years when the Whigs were in power and during the Teddy Roosevelt - Taft presidencies), serious, financially-based recessions, panics, or depressions were the norm at more than one per generation. Further, it should be clear, even though the Right denies this as well, there is a significant difference (at a 95% confidence level) between the lengths of financial recessions vs all others.

From the above, you can distill several things:

  1. Financially-based recessions are significantly longer than any other kind.
  2. Financially-based recessions are linked to Classical economics but not Keynesian (given there are no instances during the Keynesian period)
  3. Keynesian economics appears to lead to a much more stable economy over all.


AMAZON ON RECESSIONS

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Comments 6 comments

Larry Rankin profile image

Larry Rankin 17 months ago from Oklahoma

We may disagree on the occasional fine point, bus as usual, you're talking my language.

Great analysis.


My Esoteric profile image

My Esoteric 17 months ago from Keystone Heights, FL Author

Thanks Larry, the numbers tell a clear story here.


phdast7 profile image

phdast7 17 months ago from Atlanta, Georgia

Thank you for dealing with data in a dispassionate manner. You give me a glimmer of hope that I can understand this sort of thing. Hope all is well. Theresa


My Esoteric profile image

My Esoteric 17 months ago from Keystone Heights, FL Author

Hope all is well with you as well, Theresa. If I am being vague (and this goes for anybody reading my data oriented hubs) please point it out so that I can improve upon it.


jhamann profile image

jhamann 17 months ago from Reno NV

Great hub, I going to share! Jamie


My Esoteric profile image

My Esoteric 17 months ago from Keystone Heights, FL Author

Thank you Jamie, I appreciate it.

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