Wednesday, November 5, 2008

Not Since the Depression?

The Washington Post's Dan Balz writes:
After a victory of historic significance, Barack Obama will inherit problems of historic proportions. Not since Franklin D. Roosevelt was inaugurated at the depths of the Great Depression in 1933 has a new president been confronted with the challenges Obama will face as he starts his presidency.
Hmm... unemployment is currently at 6.1%; I wouldn't be surprised to see it rise by January, but it is unlikely to be much worse than when Clinton was inaugurated in Jan. 1993 (7.3%) or when Reagan took office in Jan. 1981 (7.5%).

Financial crises occur with some regularity; this may be the worst since the depression, but Clinton and Reagan faced other problems.

When Clinton took office, the Federal budget deficit was over 4% of GDP and investment was slumping. The deficit has re-emerged as a problem recently, but it has not reached the chronic severity of the 1980's and 1990's, when it became a central political issue (remember Ross Perot and Paul Tsongas?).

Inflation was in double-digits when Reagan entered office, and the Volcker Fed had embarked on a painful effort at disinflation which entailed extremely high interest rates (the Fed Funds rate exceeded 19% at a couple of points in 1980 and '81).

So, yes, problems of "historic proportions" await President-Elect Obama: he will confront problems of roughly similar proportions to those faced by other Presidents in recent history. I'd guess a little worse than '93 but not as bad as '81. We didn't start the fire...

Update: Floyd Norris on the Reagan parallel.

Update #2 (11/7): Unemployment rose to 6.5% in October. The level is still modest by historical standards, but the change looks bad, according to Krugman:
The unemployment rate has now risen more than 2 percentage points from its pre-recession low. In 1990-1992 the unemployment rate rose 2.6 percentage points. Given what’s happening to retail sales, manufacturing, and so on, it’s now a certainty that unemployment has a lot further to rise. So the “worst recession in 25 years” thing is now baked in. The only question is whether we hit “worst slump since the Great Depression” territory.
The unemployment rate rose from 4.6% in October 1973 to 9% in May 1975 and from 5.6% in May 1979 to 10.8% in November 1982, increases of 4.4 and 5.2 points respectively. If we take this cycle's pre-recession low as 4.4% in March 2007, we need to get to 9.6% to be in "worst since the depression" territory by the change metric, and 10.8% by the level metric. Either way, still a long way to go (yes, I am ignoring underutilization; this is important but the data don't go back as far. I would expect that the trends would be similar, though; i.e. that past recessions also saw increases in underemployment).

Update #3 (11/9): Justin Fox notes that the combined September-October job loss amounts to 0.38% of total employment.

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