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We Survived the Great Recession of 2008-09 – WHAT NOW?. Wayne Carroll Department of Economics University of Wisconsin-Eau Claire [email protected]. The Great Recession. Started in December 2007 and probably ended around July 2009. Source: http://wwwdev.nber.org/cycles/cyclesmain.html. - PowerPoint PPT Presentation
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Wayne CarrollDepartment of EconomicsUniversity of Wisconsin-Eau [email protected]
We Survived the Great Recession of
2008-09 –
WHAT NOW?
The Great RecessionStarted in December 2007 and probably
ended around July 2009.
Aug 1929 - March 1933 43 months
Dec 2007 – July 2009 20 months
Nov 1973 - March 1975 16 months
July 1981 - Nov 1982 16 months
July 1990 - March 1991 8 months
March 2001 - Nov 2001 8 months
Source: http://wwwdev.nber.org/cycles/cyclesmain.html
Why was this recession special?The deepest since the Great
Depression.
The government response to this recession was extraordinary and will have a lasting, historic impact.
The economy has been behaving differently from before, so we’re in uncharted territory.
How do we measure recessions?Real GDPTotal employmentUnemployment rateBank creditIndustrial productionHome sales and pricesStock market prices and other asset pricesOthers
The “official” word on recessions comes from the National Bureau of Economic Research (NBER).
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
1970 1975 1980 1985 1990 1995 2000 2005 2010
National Output (Real GDP in billions of 2005 $)
0%
2%
4%
6%
8%
10%
12%
1970 1980 1990 2000 2010
U.S. Unemployment Rate
93%
94%
95%
96%
97%
98%
99%
100%
101%
102%
-5 0 5 10 15 20 25 30
Months before or after employment peak
Total Employment Relative to Peak: The Bad Recessions
2007-09
1974-75
1981-82
What about Wisconsin?Wisconsin tends to follow national economic trends (more or less)
Wisconsin was hit by the recession about as hard as the rest of the nation, and it will probably recover (or not) with the rest of the nation
70
75
80
85
90
95
100
105
1990 1995 2000 2005 2010
Nonfarm Employment Index: Wisconsin and U.S.(Seasonally adjusted; December 2007 = 100)
Wisconsin
U.S.
0%
2%
4%
6%
8%
10%
12%
1990 1995 2000 2005 2010
Unemployment Rates: Wisconsin and U.S.(Seasonally adjusted)
U.S.
Wisconsin
90
92
94
96
98
100
102
2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011
Nonfarm Employment Index: Wisconsin and U.S.(Seasonally adjusted; December 2007 = 100)
Wisconsin
U.S.
How did we get here?Broad expansion in mortgage lending and
increases in home prices starting in the 1990s.
The housing bubble burst in 2006-7.Many home owners “underwater”Increase in mortgage default ratesFinancial problems for holders of mortgage-
backed securities (http://faculty.chicagobooth.edu/raghuram.rajan/research/TheCreditCrisisDougDiamondRaghuRajanAEADec2008.pdf)
How did we get here?Risks were spread in new ways (or at an
unprecedented scale) in the housing bubble, so the downturn was much broader and deeper than anyone thought was possible. (http://www.hbs.edu/research/pdf/09-060.pdf)
Crisis of confidence recession accompanied by financial crisisConsumers are reluctant to spend or
borrowBanks are reluctant to lendBusinesses are reluctant to invest in
capital projects
Crisis of Confidence
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
1980 1985 1990 1995 2000 2005 2010
Consumption and Investment Spending(billions of 2005 dollars)
Consumption
Investment
Crisis of Confidence
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
billi
ons
Expenditures on New Housing (Real Private Residential Fixed Investment in billions of 2005 dollars)
How did we get here?
History offers lessons for policy makers:
Recessions can be long-lasting.The Fed did not act decisively in the
Great Depression – it “had to keep its powder dry for a real emergency.”
Japan suffered a deep recession and deflation starting in 1989, and the Japanese government did not respond quickly.
How did we get here?
How did we get here?Learning from history:
The Federal Reserve System has taken extraordinary steps to rescue the financial system.The Fed increased the nation’s money supply at
an annual rate of over 45% in the fourth quarter of 2008.
The Fed has dropped its target interest rate to essentially zero.
The Fed has injected hundreds of billions of dollars into banks, AIG, and other financial institutions.(http://www.federalreserve.gov/monetarypolicy/bst.htm)
http://www.frbatlanta.org/documents/research/highlights/finhighlights/FH_090810.pdf
How did we get here?
Learning from history: Congress and the president(s) enacted fiscal stimulus programs on an unprecedented (peacetime) scale
The stimulus packages have boosted the economy – how much?? – and raised the federal budget deficit.
How did we get here?Emergency Economic Stabilization Act of 2008:
Troubled Asset Relief Program (TARP) – Treasury could spend $700 billion to recapitalize banks
The American Recovery and Reinvestment Act of 2009:$787 billion injection of funds into the U.S.
economy, including $212 billion in tax cuts, in the next ten years(http://cboblog.cbo.gov/?p=208)
President Obama’s latest proposals.(http://www.nytimes.com/aponline/2010/09/10/us/politics/AP-US-Obama.html?scp=2&sq=infrastructure&st=nyt)
The federal budget deficit for fiscal year 2010 was $1.3 trillion dollars, or about 9% of GDP. (http://www.cbo.gov/doc.cfm?index=11705)
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1950 1960 1970 1980 1990 2000 2010
Federal Budget Deficits as a Share of GDP
Projected debt in 2011 from http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=economic_indicators&docid=f:32au10.txt.pdf
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1940 1950 1960 1970 1980 1990 2000 2010
National Debt (adjusted for inflation)(Billions of 2010 dollars)
Possible Future Scenarios
A double-dip recession.Many years of deflation and stagnation – like in Japan in the last twenty years.
Fiscal crisis and high inflation as a result of our high national debt
Rapid recovery – like in the early 1980s.
Most likely: a long, slow recovery.
Double-dip Recession?The economy has slowed in recent
months (although it’s still growing).State and local government spending
continues to fall.Federal stimulus spending is
declining.
But the economy will probably continue to grow.
Deflation and Stagnation?
The scary monster hiding under the bed: Japan in the last twenty years .
The 1990s were “the lost decade.”Housing bubble in late 1980s bank crisis
in 1990sSlow growth in real GDP, deflation, and high
unemployment throughout the last twenty years
(http://research.stlouisfed.org/publications/review/10/09/Bullard.pdf)
Deflation and Stagnation?
http://www.economist.com/finance/displaystory.cfm?story_id=13415153
Japan in the last twenty years: what we want to avoid!
Deflation and Stagnation?
Deflation and Stagnation?The Federal Reserve System is trying to
ensure that we’ll have some inflation over the next few years to avoid Japan’s fate:(http://www.federalreserve.gov/newsevents/press/monetary/20100810a.htm)
The Fed probably can keep us out of a deflationary trap.
Fiscal Crisis and High Inflation?
In theory (or maybe in our worst nightmares), a huge national debt could result in:Bankruptcy: the U.S. government might have to default on its debt, causing interest rates to skyrocket (the fate that threatened Greece last spring).High inflation: the government and the Fed might pay off the debt by “printing money,” which would cause inflation.
Fiscal Crisis and High Inflation?Bankruptcy? Not likely.
The U.S. economy “grew out of” deficits in the 1990s and could do it again in the long run.
U.S. Treasury bonds remain an attractive investment around the world.
High inflation? Also not likely.There’s not much evidence of inflation on the horizon.The Fed is on the watch for inflation.
Reducing the deficit (by reducing government spending) would tend to slow the economy further in the short run – not a good move now.
Rapid Recovery or Slow Growth?
Reasons for optimism:There is a lot of excess capacity in the U.S.
economy:Millions of workers looking for workBanks holding more capital and extraordinary
levels of reserves that could be lent outConsumers reducing their debts and their
spending If confidence is restored, the economy could
take off quickly – like it did after the 1981-82 recession.
Rapid Recovery or Slow Growth?
94
96
98
100
102
104
106
108
110
112
114
0 2 4 6 8 10 12 14 16
Quarters after pre-recession peak
National Output Relative to Pre-Recession Peak
1981-82
2007-09
Rapid Recovery or Slow Growth?
95
100
105
110
115
120
0 2 4 6 8 10 12 14 16
Quarters after pre-recession peak
Consumer Spending Relative to Pre-Recession Peak
1981-82
2007-09
Rapid Recovery or Slow Growth?
Reasons for pessimism:Many households are still deeply in debt,
and it will take longer for them to dig out.There’s a lot of excess capacity in the
housing market, so housing starts are not likely to pick up soon.
Many workers have been unemployed (or out of the labor force) for a long time, and their skills are getting rusty. Productivity might fall as they return to work.
My Predictions
2011 will be a good year.2012 will be an even better year.
…unless Congress chooses to cut government spending in the short run, which will slow the recovery.
