Commentary: Recession started from a fairly low point
This article first appeared in the St. Louis Beacon, Dec. 5, 2008 - Economic expansion, which began in November 2001, ended in December 2007. Although it took some time, the National Bureau of Economic Research, the widely recognized arbiter of when recessions begin and end, has made the call. The U.S. economy officially has been in a recession for about a year.
The committee of eminent economists who made the announcement decided that even though GDP continued to show some life during the year, the weight of evidence from other measures was overwhelming. Personal income adjusted for inflation, manufacturing and wholesale-retail sales, industrial production and employment all peaked late last year and have all been sinking since.
All the talk is of what must be done. But, with the expansion now past, we should examine it. Let's take a look at how this last recovery fared compared with others. How will it be remembered?
Since the stock market has everyone's attention, let's begin there. Since the Dow Jones stock price index peaked in October 2007, it has lost, depending on the day, upward of 50 percent of its market value. Not only is it below the 2007 peak, it also is lower than the previous peak set in 2000.
In other words, if you invested in a "safe" market index fund, you basically did not make any money over most of the past decade. Accounting for the annual capital gains taxes on your portfolio paid during the 2002-07 upswing, you lost even more. Don't even think about your investment return after accounting for inflation.
The expansion also will not be remembered for moving the economy forward very far. Josh Bivens and John Irons of the Economic Policy Institute have compared the economy's performance over the past six years to all other expansions since World War II. When ranked against the other 10 cycles, this one comes in dead last in nearly every category.
GDP is the most inclusive measure of economic activity. During the past six years, GDP grew less than in any other post-war expansion. To be fair, the anemic pace of economic activity coming out of the 2001 recession did not bode well for this expansion. Several factors explain this lackluster growth, a significant one being our collective reluctance to travel and spend after 9/11. The economy never really took off.
GDP approached its potential or full-employment level, but never exceeded it for any length of time. Consequently, the economy did not produce the new jobs typical of past expansions. This is evidenced by the decline in the employment-to-population ratio since 2001.
"If the employment-to-population ratio had just remained constant," write Bivens and Irons, "the economy would have an additional 3.2 million jobs today."
The picture isn't any brighter when considering other economic measures. Investment by business was slower than in other expansions, as were increases in employee compensation and wage and salary income.
The incoming Obama administration will inherit a mess. Many seem eager to give the government a much greater role in solving this current economic debacle. But caution is called for. Even with the paltry performance of the economy since 2001, we have enjoyed nearly uninterrupted economic expansion since 1982: The 1990 and 2001 recessions were very mild by any objective measure. This Long Boom arose not because of increased government intervention, but from letting markets work.
Once this storm is passed, the government must curtail its involvement in the economy as quickly as possible. The increased productivity and low inflation of the past 30 years were fueled by innovation, entrepreneurial spirit and open trade. We should not dismiss the power of free market capitalism based on recent events. Markets were and will be the foundation for economic prosperity.
Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.