A Different Kind of Recession?

If we compare the current economy to history, it’s a pretty open-and-shut case that this has been the most disappointing recovery in six decades. Previous recessions have always been followed by much more robust recoveries. The current recovery is indisputably an anomaly in its weakness and longevity.

Well, you might say, the 2008 recession was much worse than most. That’s why this recovery is much more difficult, right? Well, no. The pattern has always been that the steeper the downturn, the steeper the subsequent upturn. Even taking into account the severity of the 2008 recession, this recovery is an anomaly. The 1981-82 recession was actually deeper than the 2008 one and unemployment had gone higher. Yet by the end of 1984 the recovery was strong enough that Ronald Reagan won reelection in a historic landslide.

The bottom line is that, four years after the 2008 recession began, real per capita gross domestic product is lower and unemployment is higher than when the recession began. That has never happened before in the post-World War II era. Beyond all the numbers, a lot of people are really hurting. You have to work really, really hard to explain this economy as something that was inevitable and beyond the power of any administration to ameliorate.

Okay, you say then, it’s like the Great Depression. President Obama frequently says that this was the greatest economic crisis since then. In other words, the 2008 recession was a once-in-a-lifetime economic event that is different from most others. The Great Depression took a decade for the country to get over. We just have to have that kind of patience with the current economy.

And you do hear this argument being made by some Democrats. When someone mentions that this recovery compares unfavorably to virtually all other recoveries, they answer that it’s because the 2008 recession was a “financial recession,” that is, it was a recession that stemmed from a financial crisis, and those always take a lot longer to recover from than your run-of-the-mill recessions, they say.

This notion as pretty much knocked down in a piece by former U.S. Senator Phil Gramm and former congressional budget staffer Mike Solon in The Wall Street Journal in February. As it happens, there were a number of major economic downturns (called panics in the jargon of the day) in the years before the Great Depression. None of them had such drawn-out recoveries as the one following the Great Depression or the current one. Specifically, Gramm and Solon point out that the Panic of 1907 stemmed from a major banking crisis and stock market crash. In other words, it was clearly a “financial recession.” Yet within two years the economy came roaring back.

It is clear that the 1930s and the 2008 recession are the two outliers in terms of recoveries. So what do those two events have in common that is different from all other economic downturns? Well, for one thing there was a marked increase in federal expenditures on a scale not seen in the other cases.

Does that mean that big increases in federal spending cause recoveries to drag out a lot longer? Obviously, it’s more complicated than that. But unless you believe that the laws of economics have somehow changed and the rules are now different than ever before in modern history, there is more than enough cause to lay responsibility for the bad economy at the feet of the Obama administration. Actually, to be fair, blame has to be apportioned between the two major political parties over many years, but the current administration has definitely given a major nudge in the wrong direction. The languishing Simpson-Bowles plan, or even the Ryan budget, would be a (admittedly painful) move in the right direction.

All reasonable people would agree that the government needs to provide a certain level of services and a social safety net. But we need to seriously examine why federal spending for 2012 is at an estimated 24.3 percent of GDP (higher than any time in history, excluding World War II) compared to 18.2 percent in 2000. The growth in spending—which has resulted in the government coopting more of the economy—is certainly motivated by compassion. But it appears that we may have reached a point where the more we spend in the name of helping those who are less well off, the more people there are out there who are made less well off by a bad economy—and who are thus added to the numbers of people who need to be helped.

If an individual—instead of a society—were doing this, it would be considered a disease and would be called Munchausen by proxy syndrome.