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Home Publications Blogs Beat the Press The Seventies Were Not Like the Great Recession

The Seventies Were Not Like the Great Recession

Wednesday, 21 May 2014 20:54

I'm back (thanks for all the kind comments) and I see I have to correct some seriously misleading commentary from Robert Samuelson earlier in the week. Samuelson concluded a discussion of Timothy Geithner's new book:

"This is the central lesson of the crisis. Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. This also happened in the 1960s, when the belief that economists could control the business cycle led to inflation and instability in the 1970s and early 1980s. But the lesson is not acknowledged because its implications are unpopular (an obsession with short-term stability may backfire), and it’s ignored — or even denied — by the post-crisis narratives, including Geithner’s."

Sorry, this one is not quite right. The pain suffered by people in the 1970s is not in the same ballpark as with the Great Recession. In the 1970s the stock market tanked, but since most people own little or no stock, who gives a damn? The economy generated 19.7 million jobs in the decade, an increase of 27.6 percent. By contrast in the 14 years from January of 2000 to January of 2014 the economy created just 6.5 million jobs, an increase of just 5.0 percent.

Most of this difference is explained by demographics (the baby boomers were entering the labor force in the 1970s, they are starting to leave now), but it was still an impressive feat to accommodate such a large expansion of the labor force in a relatively short period of time. In addition, the economy was hit by two large oil shocks that made the process considerably more difficult.

There was no prolonged period in which the economy was below its potential level of output in the 1970s. In fact, the Congressional Budget Office (CBO) puts the economy as operating above potential output for part of the decade. By contrast, CBO calculates that the economy has been roughly 6 percent below potential GDP for most of the last 5 years (@ $1 trillion a year). This represents a massive amount of lost output.

And, in direct contradiction of Samuelson's assertion, the failure to deal with the short-term can lead to serious long-term consequences. A recent paper by the Fed calculates that that potential GDP has fallen sharply as a result of the prolonged downturn. This implies that the failure to carry through short-term stabilization can lead to serious long-term consequences.

In short, Samuelson's central lesson lacks any evidence or logic to support it.

Comments (13)Add Comment
Welcome Back!
written by geraldmcgrew, May 21, 2014 11:57
I'm guessing the 70s qualify as a long-term crisis when compared to the 50s and 60s, but even a non-economist like myself knows it was nothing compared to the current downturn or, of course, the 1930s. Thanks, as always, for providing further evidence.

And it seems that the restructured economy we've had since about 1980 has been a cure seriously worse than the disease.
Welcome back!
written by geraldmcgrew, May 22, 2014 12:02
I'm guessing the 70s qualify as a long-term crisis compared to the 50s and 60s, but even a non-economist like myself knows the seventies can't compare to the current downturn or, of course, the 1930s. Thanks, as always, for providing further evidence.

And it seems that the economic structure we've had since about 1980 has been a cure seriously worse than the disease.
Sorry this appeared twice...
written by geraldmcgrew, May 22, 2014 12:26
had trouble with the security image. Please feel free to delete my second one (and then this one).
Samuelson Says We're Dead in the Long Run and Short Run
written by Last Mover, May 22, 2014 5:35
We thought we had outgrown panics. This conceit bred complacency. There is a deeper problem to which Geithner alludes only in passing. Prolonged financial “stability can produce excessive confidence, which produces the seeds of future instability,” he writes. Precisely. The long boom beginning in 1982 and lasting until 2007 — a quarter-century interrupted by only modest and temporary setbacks — convinced bankers, business leaders, economists and households that economic risk was waning. Practices once thought to be dangerous seemed less so.

Since Samuelson has a habit of contradicting himself in every other paragraph on anything economic, it's worthy to note in this case he effectively channels the essence of Hyman Minsky:

A capitalist economy breeds instability in exactly those conditions believed to be stable.

So there you have it. Samuelson says when economists tamper with the "natural business cycle" in the short run it always backfires in the long run. Then he says when there is prolonged financial stability in the long run something just below the surface is simmering into a crisis because it's ignored by economists.

So America can't win for losing, but if it does win, it will eventually lose anyway.

Thanks once again for covering all the bases Robert Samuelson. As any economist knows, if anything and everything could have happened, then effectively nothing could have happened.

What an insight.
70s felt much worse
written by Melissa, May 22, 2014 5:37
I was just a child in the 70s, but I will never forget waiting with my mother in the car for very long periods of time, upwards of an hour, just to fill the gas tank. Ordinary people don't understand the macro data, but they know the economy is "broken" when they have to take precious hours per week of their leisure time to do something as mundane as buy gas.
written by djb, May 22, 2014 6:19

Interesting how he also blames reagans recession in early 80s on policies in 60s and 70s
written by skeptonomist, May 22, 2014 9:41
Dean jumps on a sentence in Samuelson's piece, but most of if actually makes sense (unusual for Samuelson), in that prosperity tends to make people think they know how to control the economy. There was no major collapse of GDP in the 70's but a number of things happened which can be attributed to overconfidence of one kind or another. Banks and S&L's were deregulated but they overextended badly and many failed. This problem did not really become acute until the end of the 80's when the S&L insurance company had to be bailed out, and this contributed to the recession of 1990. Samuelson says the leaders in later times had no experience of the results of overconfidence but actually they must have known about this failure of deregulation, they just didn't learn from it.

Monetary theorists thought they knew how to control inflation and the Fed applied some specific dogmas (the Phillips curve and Friedman's idea of controlling the aggregates) in the 70's but the Fed and other central banks failed miserably in stopping inflation. It is often claimed that Volcker finally conquered inflation by raising rates very high after 1980, but as Dean has pointed out before inflation came down in other countries which did not do this, and if this is really what did it it was only at the cost of raising unemployment to 10.8%, still the post-Depression high. Economists don't really seem to have learned from this and still assume that the Fed has the ability to fine-tune both inflation and unemployment. One reason that regulations continued to be loosened is that it was assumed that the Maestros could counter any problems (Bernanke told us this in his "Apology to Milton and Anna" speech).

Another thing which certainly happened in the 70's is that real wages crashed badly while corporate profits did not decline over the decade. Exactly what role the Fed played in this is difficult to assess, but certainly its efforts to control inflation did no good for wage earners. It is hardly indisputable that Fed intervention in the 70's was beneficial.
1970s instability wasn't a result of economists' optimism
written by David Morris, May 22, 2014 10:17
Johnson's spending on Vietnam War and refusal to raise taxes to pay for it increased inflation, but the fundamental instability of the 1970s resulted from the quadrupling of oil prices in 1973-74 and another doubling in 1978-80.
written by Dryly 41, May 22, 2014 3:41
I think Mr. Samuelson left out some facts. The economists in the Kennedy/Johnson administration felt that targeting the oligopolistic industries such as steel and autos to keep wage increases within the increase in productivity plus 2% for growth would be a better way to attack inflation than the blunderbuss approach of the Fed taking away the punchbowel for the entire economy causing recessions in 1954, 1858, and, 1960. This was called an "incomes policy" which established "wage-price guideposts" without lawful effect but subject to "jawboning" the parties. It worked until Congress delayed a tax surcharge to pay for Viet Nam that inflation increase to 3%-4% in 1968.

Nixon scrapped the "incomes policy" and inflation ensued. He thought the 1960 Fed induced recession cost him the 1960 election and imposed wage and price controls on the entire economy in August 1971. At the same time he pressured the weak and feckless Fed Chair, Arthur Burns, whom he had appointed to pursue an expansionary monetary policy in an inflationary environment, albeit, one with wage and price controls.

It worked. Prices remained stable with controls and Nixon was re-elected. When the controls were lifted, accelerating inflation occurred with a Fed induced recession. A new word was coined to describe this: "Stagflation".

This is not easy to achieve as it had never occurred before, and, fortunately, not since.
Not a defence of Geithner
written by Dave, May 22, 2014 4:31
I think a lot of people will read this as a defense of Geithner, and I'm quite certain that it isn't such.

The information is enlightening and believable. I can remember the inflation of the 70s. The fact is that nobody was hurting all that bad, from my memory. Things like buying houses were harder, but nobody thought much of it.

The numbers were something to behold, but the reality was pretty nominal.
written by watermelonpunch, May 22, 2014 8:27
Speak for yourself Melissa! Tell that to people who've spent countless hours in fruitless job searches applying for mundane jobs they never even get for months and years on end the past 5 years!!
economy grew 100% faster
written by joe, May 23, 2014 12:46
The annual growth rate is more than 100% higher during the 13 year period 70 to 83 when compared to 00 to 13. The real unskilled wage grew .19%/year from 70 to 83 while it fell .24%/year from 00 to 13.

1970 to 1983
Real GDP per capita1.79%/year

2000 to 2013
Real GDP per capita0.87%

written by joe, May 23, 2014 12:51
Regarding skeptonomist's claim "Another thing which certainly happened in the 70's is that real wages crashed badly"

Real wages grew during the 70s.

US 1970 to 1980
Consumer Price Index7.81%
Unskilled Wage8.21%
Production Worker Compensation8.78%

The real unskilled wage decreased from 2000 to 2010.
US 2000 to 2010
Consumer Price Index2.39%
Unskilled Wage2.12%
Production Worker Compensation3.17%

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.