Double Dips...or More

Wednesday, January 12, 2011

The optimism that emerged in the early stages of the recovery from the financial crisis has given way to more sobering assessments of the challenges to the global and national economies.

In many countries, people fear a prolonged period of slow and occasionally negative growth, persistent obstacles to reducing unemployment, and continued economic anxiety; worse, a Japanese-style “lost decade” with multiple recessions; or, even worse, a depression (a fear that politicians and intellectuals have stoked in an attempt to justify massive government intervention for years to come).

Are multiple downturns unusual in periods of severe economic distress? It would be useful to know before trying repeatedly to pump up the economy in the short run with costly policies that might worsen longer-run prospects.

The global recession was severe, unmatched since World War II, with the possible exception of the early 1980s (when, for example, the U.S. unemployment rate soared to 10.8 percent as a byproduct of the disinflation from the double-digit price growth of the late 1970s). From the beginning of the crisis in December 2007 to the apparent end of the recession in the summer of 2009, the decline in real GDP in the United States was 3.8 percent.

All the other G-7 economies (Japan, Germany, Italy, France, Canada, and the United Kingdom) experienced severe recessions as well during this period. Major middle-income trading economies, such as Brazil, South Korea, Singapore, and Taiwan, experienced brief but even sharper declines. The downturn was so severe, and lasted so long, that some even used the term “depression,” before settling on “Great Recession.”

How exactly is a recession defined? Different national statistical agencies define, and therefore date, such episodes somewhat differently. In the United States, a nonpartisan, nonprofit private research institution conducts the official dating, thus wisely depoliticizing the measurement.

The 1973–75 period in the United States, with eight quarters of alternating gains and losses in real GDP, might be seen as a single quadruple-dip recession.

The point at which the economy stops growing is called the peak and the point at which it stops contracting the trough. The period from the point at which the economy starts to grow again until the point at which it reaches the previous peak is called the recovery. Thereafter, growth is labeled an expansion.

For economists, a recession is over when the economy starts to grow. The economy falls to the bottom of a well, and then, as soon as it begins to climb out, the recession is declared over, even though it may be a long climb back to the top. Little wonder, then, that ordinary citizens consider a recession over only when the economy has returned to “normal,” a point when incomes are rising and jobs no longer desperately scarce.

A common rule of thumb is that two consecutive quarters of falling real GDP constitute a recession. But sometimes recessions don’t satisfy this rule. Neither the 2001 nor the 1974–75 U.S. recessions met that criterion. In addition to real GDP, experts consider employment, income, and sales, as well as the depth, duration, and diffusion of the downturn throughout the overall economy.

Sometimes dating a recession is a judgment call. The United States had a brief, sharp recession in 1980, followed by a long and severe one in 1981–82. Many economists think of those years as making up one major episode, which is probably the appropriate way to see them in a broader historical context. But the economy did indeed grow in the interim—just barely enough to register distinct recessions. And, since they were separated by a transition from President Jimmy Carter to President Ronald Reagan, it was politically consequential that two recessions were identified.

Likewise, the recent recession was officially dated as starting in December 2007, but it could equally well have been dated as starting in the summer of 2008 because, in the interim, the economy grew.

Double-dip downturns are more the rule than the exception. If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980–82 period in the United States is a classic example. In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973–75 period in the United States, with eight quarters of alternating gains and losses in real GDP, was a single quadruple-dip recession.

The economy falls to the bottom of a well, and then, as soon as it begins to climb out, the recession is declared over, even though it may be a long climb back to the top.

Around the same time, Germany had this type of double dip and Britain a quadruple dip. In the early 1980s, Britain, Japan, Italy, and Germany all had double dips. America’s 2001 recession was one brief, mild double dip. Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth. If the economy declines again—a highly plausible prospect—we would have a triple dip, although perhaps not an outright second recession.

History thus suggests that economies seldom grow out of recessions continuously. Double dips, triple dips, and quadruple dips have been America’s recessionary experience since the Second World War, and similar episodes have been common in many other countries. Japan, for example, had three recessions in its lost decade, starting in the 1990s, despite a long string of large Keynesian stimulus programs that left it with the worst public-debt burden among advanced economies.

While the baseline forecast seems to be slow global growth—in the United States around 3 percent, about half the usual pace after deep recessions—history suggests that another decline would hardly be surprising before sustained stronger growth emerges.