Thursday, February 12, 2009

Anti-Recession Legislation

Reason.com has an interesting chart about the the timing of anti-recession legislation and the end of recessions.



The pattern is that every recession from 1948 to 1991 has involved legislation designed to combat the recession passed either right as the recession is ending or after the recessions is over. Recessions aren't officially declared until considerable time has elapsed. The current recession began in January of 2008, but wasn't declared until December. And similarly we probably won't know when this recession is officially over until many months after. This is one of the big problems with anti-recession legislation to begin with--knowing whether there's a recession going on while it's going on.

Nick Gillespie whimsically quips that this could indicate that our current recession must be over, now that the stimulus bill is passed. Perhaps so, but I think the big lesson to learn from this is that the economy has recovered time and time again without help. You could add to that list basically every recession and depression prior to 1929, at which time government intervention in such affairs was still quite restricted by constitutional considerations. And the Congressional Budget Office already predicted that the current recession will end in the latter half of this year without the stimulus package. In fact the only two exceptions are the Great Depression and the 2001 recession (if you consider the last year's tax rebates stimulus, you could count this recession too). The Great Depression is by far the recession characterized by the greatest and swiftest stimulus of all. Hoover initiated stimulus in 1930, immediately after the stock market crash, and continued through 1931. When Roosevelt entered office, he continued with the New Deal in 1933 and then again in 1935-36. It leads one to think that perhaps eight years of economic stimulus may have made the thing worse, since all the other recessions and depression were much shorter and less severe. Looking at the data overall, the sensible conclusion would be that if Hoover had been as sluggish as Harding was in 1920 during that recession, then there would have only been a 1929-30 recession, and that if the governments of all those other recessions had been more swift from 1948 to 1990, then we may have had some really bad depressions.

There may be theoretical reasons to reject this conclusion, but that would require one to assume that the typical examples are in fact the exceptions and the exceptions are in fact typical.

2 comments:

toronto realtor said...

Interesting point of view, Joe. "Congressional Budget Office already predicted that the current recession will end in the latter half of this year without the stimulus package." But how exactly? With stimulus package or without it, that's not important. But how could the recession be gone later this year? This time not only ordinary middle class residents are loosing money, but also banks are as dry as they could be. I'd just like to know on what bases does the Budget Office concludes.
Julie

Joe said...

The CBO uses macroeconomic models, which ultimately are highly speculative. I wouldn't put too much confidence in it, but it is based on historical trends, which show that economies have always recovered on their own. The predictions of the CBO were that the economy would recover without the stimulus. But they also ran the numbers with the stimulus and showed recovery this year, but with economic decline a few years down the road because of the stimulus. Take the predictions with a grain of salt, but I think the general idea is sound, things will get better soon with or without the stimulus, but with the stimulus, they'll get worse down the road.