As we began to write our Principles of Economics text (Roy Ruffin and Paul Gregory, Principles of Economics) exactly thirty years ago, economics was in disarray, shaken by the stagflation that was not supposed to be. Ours was among the first to introduce the new ideas of the 1980s -- rational expectations, Barro-Ricardo equivalence, the natural rate of unemployment, moral hazard, and new Keynesian economics. At that time, Economics 101 was taught, with few exceptions, the unabashed Keynesianism of Samuelson and McConnell. Principles textbooks are intended to give a sense of the state of economics. Selected by committees, they must at least try to give a balanced viewpoint. Although labeled “conservative,” our text garnered strong sales for a decade. We must have done something right.
Will the deep recession, which likely ended in late 2009, require a rethinking of economics, as did stagflation? Compared to other economic downturns of the past forty years, the current recession definitely stands out. Its probable 20-month duration is greater than the previous peak of 16 months (and the 40-year average of 11 months); its peak unemployment of 10.2 percent was exceeded only by the 10.8 percent of 1981-82 (The 40-year average was 7.8 percent); and the 4.1 percent loss of output well exceeds that of previous recessions. Moreover, it follows a long period of economic growth, interrupted by extremely mild recessions, dubbed “the Great Moderation.” The current recession, despite its severity, pales in comparison to the Great Depression with its 25 percent unemployment rates and loss of a quarter of GDP. The threat of a repeat of this catastrophe was remote, although politicians could not resist invoking its image.