STANFORD – The optimism that emerged in the early stages of the recovery from the financial crisis and recession has given way to more sobering assessments of the short-, medium-, and long-run challenges facing the global economy and its constituent national parts.
In many countries, fears have even arisen of a prolonged period of slow and occasionally negative growth, persistent obstacles to reducing unemployment, and continued economic anxiety; or worse, of a Japanese-style “lost decade” with multiple recessions; or, even worse, of a depression, (which politicians and intellectuals have stoked in an attempt to justify continued massive government intervention in the economy for years to come).
But are multiple downturns so unusual in periods of severe economic distress? It would be useful to know the answer to this question before trying repeatedly to pump up the economy in the short run with costly policies that might worsen longer-run prospects.
The global recession was severe, unmatched since World War II, with the possible exception of the early 1980’s (when, for example, the unemployment rate in America soared to 10.8% as a by-product of the disinflation from the double-digit price growth of the late 1970’s). From the beginning of the crisis in December 2007 to the apparent end of the recession in the summer of 2009, the decline in real GDP in the US was 3.8%.
All the other G-7 economies (Japan, Germany, Italy, France, Canada, and the United Kingdom) experienced severe recessions as well during this period. Major middle-income trading economies, such as Brazil, South Korea, Singapore, and Taiwan, experienced brief but even sharper declines. The downturn was so severe, and lasted so long, that some even used the term “depression,” before settling on “Great Recession.”
How exactly is a recession defined? Different national statistical agencies define, and therefore date, such episodes somewhat differently. In the US, recessions are officially dated by a non-partisan, non-profit private research institution, thus wisely depoliticizing the measurement.
The point at which the economy stops growing is called the “peak,” and the point at which it stops contracting, the “trough.” The period from the point at which the economy starts to grow again until the point at which it reaches the previous peak is called the “recovery.” Thereafter, growth is labeled an “expansion.”
For economists, a recession is over when the economy starts to grow. The economy falls to the bottom of a well, and then, as soon as it begins to climb itself out, the recession is declared “over,” even though it may be a long climb back to the top. Little wonder, then, that ordinary citizens consider a recession over only when the economy has returned to “normal,” which means that incomes are rising and jobs are no longer desperately scarce.
A common rule of thumb is that two consecutive quarters of falling real GDP constitute a recession. But sometimes recessions don’t satisfy this rule. Neither the 2001 nor the 1974/1975 US recessions met that criterion. In addition to real GDP, employment, income, and sales are considered, as are the depth, duration, and diffusion of the downturn throughout the overall economy.
Sometimes dating a recession is a judgment call. America had a brief, sharp recession in 1980, followed by a long and severe one in 1981/1982. Many economists believe that it was one major episode, and that is probably the appropriate way to think about it in a broader historical context.
But the economy did indeed grow in the interim – just barely enough to consider them distinct recessions. And, since they were separated by a transition from President Jimmy Carter to President Ronald Reagan, it was politically consequential that two recessions were identified. Likewise, the recent recession was officially dated as starting in December, 2007, but it could equally well have been dated as starting in the summer of 2008 because, in the interim, the economy grew.
Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980-1982 period in the US is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-1975 period in the US, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.
These are not rare occurrences. Around the same time, Germany had this type of double dip and the UK a quadruple dip. In the early 1980’s, the UK, Japan, Italy, and Germany all had double dips. America’s 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth. If the economy declines again – a highly plausible prospect – we would have a triple dip, although perhaps not an outright second recession.
So history suggests that economies seldom grow out of recessions continuously, without an occasional subsequent decline. Double dips, triple dips, and quadruple dips have been America’s recessionary experience since WWII. And similar episodes have been common in many other countries. Japan, for example, had three recessions in its “lost decade,” starting in the 1990’s, despite a long string of large Keynesian stimulus programs that left it with the worst public-debt burden among advanced economies.
While the baseline forecast seems to be slow global growth – in the US around 3%, about half the usual pace following deep recessions – history suggests that another decline would hardly be surprising before sustained stronger growth emerges.