Aggressive Fiscal Policy Eased Impact of Recession

By Jeff Madrick N. Y. Times News Service | THE JOURNAL RECORD, April 22, 2002 | Go to article overview

Aggressive Fiscal Policy Eased Impact of Recession


Jeff Madrick N. Y. Times News Service, THE JOURNAL RECORD


The conventional wisdom these days seems to be that if you blinked you missed this recession.

Some even argue there was no recession. They say there is a new economy, in which business now adjusts much faster than it once did, partly because it has better and quicker information on which to base decisions.

Others say productivity growth will keep up because of heavy investment in high technology in the late 1990s. Others suggest that the embrace of free markets has simply made the economy more efficient by keeping the government out.

But in fact, a closer look at the data shows that it was a typical recession by most measures, especially in terms of jobs lost. By some measures, it even lasted longer than other recessions. And the greatest irony is that it may well have been worse except for the government's reaction to the events of Sept. 11. Aggressive monetary and fiscal policy restored growth. The government apparently bailed us out.

The confusion begins with our overreliance on the gross domestic product -- the annual amount of goods, services, business investment and government spending -- as the arbiter of recession. Its flip side is the nation's income: wages and salaries, profits, interest and rent. But GDP does not tell us how many people have jobs or whether they are working longer. It does not tell us how much was borrowed to support capital spending or consumption. But if GDP, discounted for inflation, falls for two quarters, we are told we are in a recession.

This time around, GDP fell only briefly. Over the course of the recession, which began in March 2001 and possibly ended late in the winter, GDP after inflation fell only 0.34 percent, according to the Economic Cycle Research Institute. The shallowest recession before this was in 1969 and 1970, when GDP dipped 0.61 percent. The worst, by this measure, was the 1973-75 recession, when GDP fell 3.4 percent.

But now let's look at employment. Jobs were lost at a far faster pace than the modest fall in GDP suggests. According to the government's monthly payroll survey, the nation lost about 1.4 million jobs since March 2001 -- more than in three of the six other recessions since 1960.

A better way to look at it is in percentage terms because the job market grows. Even so, the number of jobs fell 1.1 percent from March to February. In other words, employment fell three times as fast as GDP. This never happened before. In all recessions since 1973-75, employment fell about as much as GDP. In 1981-82, for example, jobs declined by 2.8 million, or about 3 percent, while GDP fell 2.9 percent.

No wonder productivity rose this time. Productivity is nothing more than the number of hours worked divided by the output of goods and services. If the nation fires its workers much faster than its sales fall, productivity rises because hours worked for each dollar of revenue falls. What may be newest about this new economy is not information technology or free markets, but the freedom corporations have to fire at will.

Capital investment and profits also plunged. …

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