A ta(b)le of US recessions

Consumers, corporations and governments have become increasingly used to relatively short recessions followed by long periods of expansions. This could be the result of a better understanding of the economy and how to fight recessions. Another explanation is that authorities have used all reserves in the economy available to ensure each recession is as short as possible. This means not much reserves are left, meaning that the following recessions could be longer, while the subsequent recoveries will be shorter. 

The following table shows all the recessions in the US since 1900 and the length of the subsequent growth period. Incidentally, in general, recession in the US in the period after World War II meant sharp decline in the rest of the world.

The table highlights a number of interesting points:

• 9 of the total of 20 recessions in the 20^th century took place in the first 34 years.
• After the Great Depression, not only was the number of recessions lower, relatively, but they also lasted almost half as long on average.
• Moreover, the expansion following each recession after the Great Depression lasted an average of 60 months, more than twice as long as the average in the first 33 years of the century. 

These improved growth figures after the Great Depression are partly attributable to high productivity growth (computerisation, technological breakthroughs and more efficient production methods), growth of the working population in the West (more women started working, in particular) and the fall of communism making new production and sales markets available. Fiscal and monetary policy also had a great – if not the greatest – effect. After the Great Depression, Keynes’ theory was widely applied in economic policy. Governments started implementing an anti-cyclic budgeting policy, bumping up their budget deficits in times of economic decline and pulling in their horns in boom times. After the 1960s, monetary policy became a popular method for managing the economy. According to the economist Friedman, in particular, fiscal policy had little effect, as, in anticipation of higher taxes in the future, consumers saved just as much as governments increased their expenditure (Friedman was then still assuming that governments saved as much in good times as the spent extra in worse times). On the other hand, it was better for central banks to stimulate the economy by lowering interest rates than to inhibit it by increasing them.

In principle, both Keynes’ and Friedman’s theories were excellent ways of managing the economy, but in practice the theories were primarily misused to achieve artificially high growth. Governments did, indeed, increase their budget deficits to stimulate the economy in times of recession, but they neglected to compensate for those deficits with surpluses in periods of high growth. In many cases, governments retained budget deficits and shifted the focus to debts in relation to the economy. If, for example, the economy was growing by 3%, then a deficit of 2% was acceptable, as the amount of debts as a percentage of the economy was still shrinking.

Artificially high growth was also achieved through monetary policy:

• In general, monetary policy is more quickly eased in the event of economic shrinkage than tightened in the event of economic expansion, to avoid nipping a fragile recovery in the bud.
• In the late 1980s, monetary policy was increasingly determined according to the Greenspan doctrine, tightening as soon as inflation rises. Due to the emergence of Asia and Eastern Europe, high productivity growth and a sharp increase in production capacity inflation was under downward pressure for a long time. Monetary policy therefore remained extremely easy for a long time and long-term interest rates fell. This brought about a long-term positive spiral of low interest rates, rising asset prices, consumers borrowing and consuming more and companies investing more and taking on more people, which resulted in more rapid economic growth, further rises in asset prices and so forth.

However, the consequence is that not much fiscal and monetary reserves are left, meaning that the following recessions could be longer, while the subsequent recoveries will be shorter.