The Economy Is Bad, but 1982 Was Worse

New York Times: The Economy Is Bad, but 1982 Was Worse

You often hear that we are now living through the worst recession since the early 1980s, and the comparison is not wrong. But it’s ultimately unsatisfying, because it is a little too vague to be useful.

Is the economy only a little worse than it was in the last couple recessions, as some have said, and still a long way from the dark days of 1982? Or are we instead on our way toward something that may even approach the severity of the Great Depression? …

…  I thought it would make sense to get some clearer historical perspective, and the economists at the Bureau of Labor Statistics were nice enough to help me do so. In the last week, they helped me put together a broad measure of the job market — one including both official unemployment and more subtle kinds — stretching back to 1970. Since the job market covers the entire economy and affects families in tangible ways, it seems to be the single best yardstick.

And it shows, for starters, that the economy is not yet as bad as it was in the early 1980s. It’s not even that close to being as bad. The ranks of unemployed and underemployed, controlling for the size of the population, were much larger in 1982 than today. …

… So suffice it to say that the serious recent declines in retail sales, business spending and employment make it highly unusual that the economy will improve anytime soon. The job market will almost certainly continue to worsen for most of 2009. Even if the much-needed stimulus bill passes, the economy is likely to end the year in roughly as bad a shape as its 1982 nadir. Which is saying something. …

 So why are public opinion polls showing Americans to be even gloomier about the economy today than they were back then? I think there are two main reasons.

First, the economic expansion that just ended wasn’t as good as the 1970s expansions. The ’70s get a bad rap, and deservedly so in many ways. But median family income still rose 2 percent during the decade, after adjusting for inflation. Over the past decade, it has fallen.

Second, people seem to understand that the worst is yet to come — that the economy has not yet worked off its excesses. …

There is more to the story about his point about median family income falling over the last decade. Family characteristics have been changing in recent years. The average family size has declined slightly. There has also been a widening of differences in family size between the top and bottom quintiles of family income. It is now 3.1 on average for the top quintile and 1.9 for the lowest. Considering these factors, per capita income (as opposed to family income) has been rising.

I think there is a third reason for the gloominess, which the author alludes to in the article. Almost half the U. S. population is not old enough to remember the recession in the early 1980s. I graduated from college in 1981. I remember it! Those younger than me have no personal baseline to compare our current troubles. Pre-1980s, and especially pre-WWII, significant recessions were an ongoing pattern. We have become quite spoiled over the past quarter century.

There is also likely a fourth reason. A sensationalist media combined with the arrival of an election year. Some powerful interests have a stake in making things look as bad as they can paint them.

Some comparisons from Mark Perry:

Prime Rate
1981: 20.5%
2009: 3.25% (Current)

Inflation
1980: 14.8%
2008: 0% (December)

Unemployment Rate
1982: 10.8%
2008: 7.2% (December)

30-Year Mortgage Rate
1981: 18.5%
2009: 4.96% (Current)

Real Gas Price (2008 dollars)
1981: $3.45 per gallon
2009: $1.82 (Current)


Comments

7 responses to “The Economy Is Bad, but 1982 Was Worse”

  1. What interests me about much of this crisis is that it appears that the actual productive capacity of our nations has not decreased. The raw materials, infastructure and extractive/refining technology is still all in place. It’s not as though all the machines have gne rusty. . . . Perhaps I’m too naieve, but we haven’t actually “lost” any real things. . . have we?

  2. Good point.
    The 1980s recession was multifaceted. This one has been concentrated mostly in one sector: financial markets. Unfortunately, financial markets are like the oil in our car. Oil doesn’t do a lot but it keeps the parts lubricated so they can do their jobs. Once the financial markets get healthy again I think things will improve but I expect that is months away.
    That is my best stab at analogy but I think you are right. All the other stuff is in pretty good shape … at least for now.

  3. it is amazing to me how high interest rates were back then. i look at my 6% 30 year mortgage and am shocked by the amount paid in interest! why were rates so high back then?

  4. Some economists have have built their entire career on answering that one. 🙂
    Stagflation is the short answer. Historically, as inflation goes up unemployment is supposed to go down and vica versa. In the 1970s, both were rising together.
    Multiple OPEC oil embargos sent oil prices sharply higher at points throughout the 1970s. That made the cost of everything higher while reducing demand and thus employment. Meanwhile, Nixon and Carter piled on wage and price controls, as well as heavy regulation. That created distorted markets. Furthermore, the Fed kept pumping money into the system in an attempt to stimulate the economy but generally only stimulated inflation.
    The opening to the wikipedia article gives a good summary. Keep in mind that while your mortgage rate was at 15-20%, your salary was also increasing at a rate of 10% or more in some years. Everything was out of whack.

  5. vanskaamper Avatar
    vanskaamper

    I miss Reagan.

  6. Unemployment and infation were worse in 1982, but the banking system was not on the verge of collapse. The auto industry was not as big a mess in 1982.
    You have lost some things. Investments made in car manufacturing and other related activities are now worthless. Many of your assets are now owned by the Gulf States or Asian governments. Who knows what the Chinese will end up owning when they cash in their treasury bills? So you have lost some stuff or you still have it, but it is owned by someone else or is worthless.

  7. In some ways it is not radically different. The government bailed out Chrysler in 1979. Just like China today, many then were anxious about how much Arab states and Japan owned in the U.S. But each recession has its own signature.

Leave a Reply

Discover more from Kruse Kronicle

Subscribe now to keep reading and get access to the full archive.

Continue reading