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Friday, September 18, 2009

I try not to repost often on this blog, but Greg Mankiw posted a couple gems on judging economic downturns. I will try to condense the two posts:

The question: Does comparing the decline in real GDP provide the best comparison of recessions?

According to this method, the current recession is the worst since the Great Depression. However, Mankiw is quick to point out:
Note that the phrase the worst since the Great Depression may inadvertently lead the reader to think that we are somehow getting close to the Great Depression in severity. As the chart shows, that is not at all the case.

One might wonder why the unemployment rate was higher in the 1982 downturn if that recession had a smaller decline in GDP. Part of the answer is that the 1982 recession followed closely after the 1980 recession, from which the economy had not fully recovered when the next downturn began.
This second paragraph implies that the 1982 recession may have been more severe than this method indicates. By this logic, the more comparable (using this method) 1957 recession was likely more severe, too (following the 1953 recession so closely).

An economist at an unnamed financial firm responded to the first post, and Mankiw reposted his analysis. The anonymous contributor begins by stating:
I prefer the unemployment rate for historical analysis. In olden days, it was likely better measured than real GDP. And before 1947, there is no quarterly real GDP.
He provided the following chart, depicting the difference between the civilian unemployment rate and the natural rate of unemployment as defined by the CBO.
This method places the current recession at just about the severity of the 1982 recession. As the current unemployment rate will likely continue to increase, it is rather safe to assume this recession will surpass it. However, we must take care to remember Mankiw's words regarding the proximity of the 1982 recession to the 1980 recession.

The contributor continues:
Another way to gauge the slack is to focus on a single demographc. Let's take married men, spouse present. They are the most stable segment of the labor forcce [sic], and here is their unemployment rate:
It has been terrible this time, but not as bad as the early-1980s. Why this time seems worse is the unemployment rate for teenagers is a record high. I think we should give some blame to 3 consecutive annual hikes in the minimum wage.
I have previously posted on the effect of the latest minimum wage increase.

I encourage you to read the full posts, especially the contributor's analysis in the second link.

Posted by Eleutherian

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