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September 2003, Vol. 126, No. 9

Précis

Views of a different recession
A different view of the Depression

Précis from past issues

Views of a different recession

Now that the National Bureau of Economic Research has determined that the most recent recession ended in November 2001, the economics profession has begun to perform the exhaustive diagnostics of the downturn, the processes leading up to it, and the somewhat puzzling nature of its aftermath. Kevin L. Kliesen explores how the recession was different and the developments that preceded it in the Federal Reserve Bank of St. Louis Review. As many have noted, the recession was relatively short with its duration of eight months. It was also relatively mild, experiencing the second smallest decline in gross domestic product of the ten recessions recorded in the post-World War II era. By using various nonparametric statistical tests, Kliesen is able to assert that both shorter and milder recessions are associated with ending longer expansions.

Other noteworthy features of the recession included stronger than average performance of real disposable income which, in turn, helped sustain a relatively high level of personal consumption, equity prices fell throughout the recession rather than rallying as a leading indicator of the recovery, very large declines in inventory investment and net exports, and, during the NBER-designated term of the recession, a smaller than average rise in unemployment and decline in payroll employment.

However, as Erica L. Groshen and Simon Potter note in the August issue of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance, one aspect of the post-recession recovery has been the experience of steady growth in output, but no corresponding strength in the labor market. In the past, according to Groshen and Potter, the job market recovery has lagged the general recovery by about a quarter, but in the two most recent recessions the lag has persisted for much longer.

They propose as an explanation that the most recent recessions have been marked by higher degrees of structural adjustment to cyclical fluctuation than had been the case in the past. "The job losses associated with cyclical shocks are temporary:" say Groshen and Potter, "at the end of the recession, industries rebound and laid off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes are permanent … ."

Turning to the data, they show that temporary layoffs, an indicator of cyclical adjustment, contributed little to the increases in unemployment in the 1990–91 or the 2001 recession. At the same time, an increasingly common pattern of job losses continuing in many industries during the recovery and continued job growth during the recession in others suggests that the share of total employment in industries experiencing structural changes has grown from 51 percent in the recessions of the mid-1970s and early 1980s to 57 percent in the 1990–91 down-turn to 79 percent in 2001.

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A different view of the Depression

Given the disastrous perception of the 1930s in the popular and, to only a slightly lesser extent, the professional economic eye, Alexander J. Field’s, hypothesis that they were "the most technologically progressive decade of the [20th] century," is startling. Writing in American Economic Review, Field examines trends in multifactor productivity growth—that component of labor productivity growth that remains as a residual once the growth of other conventionally measured inputs has been accounted for—and adopts the interpretation of that residual as primarily a reflection of the impact of technical change. Field first narrows the timing of the most rapid growth in multifactor productivity from a "consensus that looking back over the course of U.S. history, the period between roughly 1905 and 1966 experienced exceptionally high rates of multifactor productivity growth," to a finding shared by several other economists that the highest rates within that era are to be found between, again roughly, 1929 and 1948.

Within that smaller span, Field notes that there have been two lines of analysis. One is a story that locates the bulk of the higher performance in the extraordinary production efforts of the Second World War. These analysts have often referred to an influential book from the early 1960s that found that multifactor productivity in the private domestic economy slowed substantially between the 1919–1929 and 1929–1937 periods. As Field notes, "Given the conventional emphasis on the boom of the 1920s and its contrast with the disastrous macroeconomic performance of the 1930s, we might be inclined to accept this differential and move on to more interesting matters."

What interested Field, however, was the fact that the 1929–1937 period represents a passage in the business cycle and that probably is not a good comparison to 1919–1929. Field suggests moving the comparison period’s endpoint out to 1941, a year picked to be more comparable in terms of the business cycle, yet not much affected by spending on the coming war. By his calculation, there was a "compound annual average growth rate of private domestic economy MFP of 2.27 percent per year between 1929 and 1941. In contrast, MFP grows at 1.51 percent per year between 1941 and 1948."

In the remainder of the paper, Field outlines strategies for explaining the high rate of multifactor productivity growth in the 1930s. He attributes significant parts to the development of public infrastructure, the timing of key scientific innovations, and specific sectoral developments in, for example, chemicals, communications, electrical machinery, structural engineering, and aviation. And part he ascribes to "serendipity"—the confluence of these developments during an otherwise bleak economic decade.

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