The 70s Don't Look Like This Downturn

Robert Samuelson tried to explain the Fed's failure to recognize that the collapse of the housing bubble, which had been driving the economy in the last cycle, would lead to a serious downturn. He blamed it on complacency that resulted from the relatively stable growth of the prior quarter century. He compared this to the complacency following the 60s boom that led to the 70s inflation.

The comparison is more than a bit off. In the four years since this downturn began, GDP growth has averaged less than 0.2 percent. (This assumes 3.0 percent growth for the fourth quarter of 2011.) By contrast, growth averaged 3.5 percent from the business cycle peak in 1970 to the peak in 1980. Even if the timing is adjusted to have the 70s end with the trough of the 1982 recession, average growth over this period would still average 2.6 percent. Growth would have to far exceed projections in order to produce a comparable record following the 2008 crash.

It is also important to note that the financial crisis has little direct relevance to the current weakness of the economy. The problem is simply that there is nothing to replace the demand generated by the housing bubble. Consumption is actually unusually high relative to income and investment in equipment and software is back to its pre-recession share of GDP.

Complacency Yields Stability and Eliminates Uncertainty to Allow Growth
written by izzatzo, January 23, 2012 5:15 AM

Any economist knows complaceny is a synonym for expectations. It's perfectly rational to expect the future to yield the past as demonstrated in time series forecast that capture systemic risks by definition.

Stupid liberals.

-5

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written by skeptonomist, January 23, 2012 8:22 AM

Finance and banking are highly relevant to the extent that recovery of housing and construction is impeded by financial and legal problems rather than supply and demand. Whether or not there is actually an oversupply of houses at present (so far as I know Dean has not directly addressed this issue with actual data), there is certainly a vast number of houses in mortgage limbo and the market will be very uncertain until this is cleared up.

complacent b/c of ideology
written by Peter K., January 23, 2012 9:26 AM

Samuelson quotes one of the economic policy elite as saying in 2006 "that we are reaching an inflection point in the housing boom. The bigger question now is whether we will experience (a) gradual cooling .?.?. or a more pronounced downturn."

The shadow banking system had been allowed to metastasize into an unregulated banking system vulnerable to a bank run and panic. This was the fault of conservative ideologues like Greenspan and their financial backers.

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written by sherparick, January 23, 2012 11:46 AM

First, it still seems that our elite, both media, political, and business, have a problem wrapping their head around depth of the free fall in the last half of 2008 and the first half of 2009. Behind their gated communities, within the cocoon of their coastal worlds, and with the comfort that stock prices in their portfolios rebounded almost 50% from the March 2009 depth, they just have not felt the devastation the rest of the country west of the Hudson and Bull Run Mountains and East of Beverely Hills went through during that 12 months bewteen 1 July 2008 to 30 June 2009 when the economy shrank by close to 5%, the biggest drop since 1937 (not counting the paper recession after WWII).

By the way, Samuelson, like a apparently a lot of people in my generation, got started professionally during the 1970s and early 1980s. The tropes and memes they learn during those years and have become calcified mental habits that they apply to all economic problems. The economic policy nail they obsess on is "inflation" and they always want to hammer it.

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written by sherparick, January 23, 2012 11:58 AM

For the underreported story of the depth of the recession, which is the prime reason for the current deficit, see: http://www.bea.gov/faq/index.cfm?faq_id=1004

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written by sherparick, January 23, 2012 12:10 PM

His column ends with a truly stupid suggestion that we should return a laissez-faire of frequent recessions, and all the unemployment and lost wealth that implies. Again, his inability and ignorance of economic history is breathtaking. WaPo stays well ahead in having the worse editorial page around.

Demand and prices.
written by Gerry Flaychy, January 23, 2012 3:30 PM

"The problem is simply that there is nothing to replace the demand generated by the housing bubble." Dean Baker

Demand depend also on prices. Let the prices go down instead of trying to inflate them, and the demand will go up.

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written by S. D. Jeffries, January 23, 2012 6:20 PM

I can't believe anyone would continue paying this man to write a column on economics...even the Washington Post.

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written by joe, January 24, 2012 1:37 AM

Gerry Flaychy, prices will only go down if purchasing power goes down.

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written by Gerry Flaychy, January 24, 2012 9:01 AM

Productivity pushes the prices down.
Competition pushes the prices down.
Inflating the monetary mass pushes the purchasing power of the money down and the prices up.

The 70s Don't Look Like This Downturn

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