Saturday, December 13, 2008

The Serious Badness of the 1980's

Macroblog has kindly answered some comments about their comparison of the current recession with past episodes. In response to a comment I left, "considering the 1981-82 recession by itself, rather than in combination with its 1980 little brother, somewhat understates the 'badness' of that period," they say:
The 81–82 recession graphs include data from 12 months before the first day of the recession to 12 months after the last day of the recession, therefore the dates range from 7/1/1980 to 11/1/1983. The 1980 recession ended in July of 1980, so these time periods overlap each other by one month. Including this month does not “understate the ‘badness’ of the period” because the calculations are based solely on the recessionary period being examined. In other words, the time span has no effect in this case. The first day of the recession is set to one. The months before and after are normalized to the first day of the recession. If we were to remove the 1980 recession date and run the time span 10 months before the 1981 recession to 10 months after, the graph does not change in anyway apart from a shorter time span. This is because the data is scaled to 7/1/1981, the beginning of the recession.
That is correct, but it misses the point I was trying to make (so perhaps I didn't make it very clearly). What I was trying to say is: the two recessions, together, represent a very long period of elevated unemployment. There wasn't much "recovery" from the 1980 recession before the 1981-82 recession began. The unemployment rate was 6.0% in December 1979; it peaked at 7.8% in July 1980, before falling to 7.2% at the end of that year. In mid-1981 it began a new climb all the way to 10.8% at the end of 1982. The unemployment rate fell to 7.2% in 1984 (Morning in America*), but didn't make it all the way back down to 6% until August 1987!

I've plotted the BLS nonfarm payroll employment series around the NBER business cycle peak dates of November 1973, January 1980, July 1981 and December 2007. The yellow line illustrates what I was trying to say... in 1980, America was at the precipice of some hard times. Now that the NBER has made its call, we know that we are 12 months out from the last peak. I'd like to hope that our position is more like July 1982 than January 1981 (i.e., I'd rather be at 12 on the green line than the yellow one).

Of course, in the 1980's, we took a certain pride in being "Bad."

*By the unemployment rate, in 1984, people were better off than they were four years ago, but not five.

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