What’s Different This Time?


Ezra Klein explains the difference between the rapid recovery of Ronald Reagan’s first term from the sluggish one of Barack Obama’s in terms of initial causation:

The problem for the Obama-Reagan comparison is that this isn’t a Fed-created recession. It’s a financial crisis. And they take longer to recover from. For the economy to recover in 1982, the Fed just had to lower interest rates. For our economy to recover, consumers need to get out from the debt they’re under and then figure out how to keep spending more and more — or exporting more and more — under some paradigm that isn’t based on debt.

A different way of looking at it is to think of the recessions in nominal terms. Here’s Nominal GDP from 1980 to 1985:

Economagic: Economic Chart Dispenser

The double-dip was associated with some flattening of Nominal GDP growth, but the deviation isn’t gigantic. What’s more, the super-rapid “catch-up” growth in real output that led us out of the recession didn’t involve anything unusually looking in nominal terms relative to the pre-recession trend. What happened was that the composition of nominal growth switched to one that involved less inflation and more “real” growth.

Compare that to more recent events:

Economagic: Economic Chart Dispenser-1

That’s an entirely different kettle of fish. In nominal terms, we experienced a dramatically bigger recession than happened in the early eighties. Normally people think of “real” GDP as more important (that’s why they call it real) but for many purposes nominal numbers are very meaningful. My mortgage payments are denominated in nominal terms, as are my cable & phone bills, my salary, and various other contracts I’m involved with. When a huge gap opens up between the actual and trend levels of nominal economic activity, that means the best-laid plans of firms and households are all thrown out of whack. This is probably a situation the Federal Reserve could ameliorate if they were willing to produce enough inflation to push the price level back into line with trend, but if they continue to insist on a policy of opportunistic disinflation the adjustments will take longer.