Recession and Depression

Number of US Recessions

  • There have been 12 US recessions since World War II.
    • Important to remember for analysis and discussions.

Graph Analysis Related to Recessions

  • Discussion on how the recession timing correlates with GDP growth.
    • The blue line tracks percent change in real GDP from twelve months ago.
    • Distinction made from the cyclical component discussed in previous lectures.
    • Rule of thumb for determining recession:
    • GDP growth dips below zero, especially with two consecutive quarters below zero, indicating a recession.

Economic Recovery After Recessions

  • Post-recession trends often resemble a seesaw effect.
    • Recessions result in negative growth, followed by recovery and growth.

Historical Recession Trends

  • Comparison of two time periods in the US:
    • From 1945 to 1985 vs. 1985 to present.
    • Four recessions occurred in the latter time frame.
      • Notable recessions include the S&L crisis, dot-com bubble burst, and the Financial Crisis.
    • In comparing the Financial Crisis and COVID lockdowns:
    • The Financial Crisis had the slowest recovery and widest recession band.
    • The COVID recession saw a rapid recovery after significant initial lockdowns.

Financial Crisis Explanation

  • The 2008 Financial Crisis was highlighted as a key event.
    • Considered the only real financial crisis since the Great Depression, affecting global recovery efforts.
    • Financial crises are characterized by:
    • Collapse of financial sectors (e.g., banks).
    • Long-lasting effects and recovery delays.
    • Ken Rogoff's book "This Time is Different" emphasized that financial crises historically lead to the longest-lasting recessions.

Discussion on Unemployment Rates

  • Overview of the relationship between recession periods and unemployment rates.
    • Unemployment tends to rise sharply during recessions and takes substantial time to recover.
    • An exploration of the three largest unemployment peaks in US history:
    • 2020 (COVID), 2008 (Financial Crisis), and 1982 (Early 80s Recession).
    • Emphasis on the significance of 1970s Oil Crisis as a catalyst for shifts in macroeconomic theory.

Unemployment Rate Statistics

  • Discussion of unemployment rates during key recessions:
    • COVID peaked around 15%.
    • 2008 peaked near 10.1%.
    • 1981-82 peaked around 11%
    • Great Depression peaked at approximately 25%.

Analysis of the Great Depression

  • Illustrative photographs showcasing human suffering during the Great Depression:
    • Emphasis on how it showcases economic hardship.
    • Understand that unemployment is measured by those actively seeking work but not finding it.
    • The Great Depression raised fundamental questions in macroeconomics that shaped future policies.

Efficiency in Economics

  • Introduction to the concept of efficiency in economics:
    • Defined as a situation where no alterations can make everyone better off.
    • Example of water distribution illustrates the challenge of achieving mutual benefit in resource allocation.
  • The critical argument for government role in intervention:
    • Efficiency defines the interaction among individuals and how government action can improve overall welfare.
  • Discussion on whether recessions are efficient or not, showcasing various academic viewpoints:
    • Proponents of recession efficiency suggest they serve a necessary economic purpose, leading to future stability.
    • Critics argue that extreme recessions like the Great Depression showcase failures needing intervention.

Causal Effects of Recessions

  • Discussions on causal mechanisms during recessionary periods:
    • Cyclical Unemployment characterized as unemployment due to economic downturns; not necessarily indicative of unproductivity or inefficiency.
    • Acknowledge the understanding of how productivity links with employment rates and how recessions impact this relationship.

Government Responses to Financial Crises

  • Examination of government roles during financial downturns:
    • Historical context of the FDIC and deposit insurance emerging in response to the Great Depression to stabilize the banking sector.
    • Understanding of liquidity vs. insolvency in financial terms, critically examining situations of bank runs (contagions) during crises.
    • Government intervention shown as effective in preventing runs through strategies like guaranteeing deposits.

Discussion on the Psychological Impact of Economic Downturns

  • The broader implications of unemployment extending beyond economic metrics to psychological welfare of individuals affected.
    • Societal implications of suffering induced by unemployment are explored, linking back to concepts of efficiency and interventions.

Concept of Coordination in Economics

  • Coordination issues identified as a core factor in exacerbating recessions:
    • Example: if the public awareness of potential economic downturn prevents individuals from acting normally (e.g., withdrawing funds due to fear), it further destabilizes an already compromised system.

Next Steps in Economic Discussion

  • Future classes will engage with current policy frameworks designed to mitigate the effects of financial downturns and unemployment, exploring lessons learned from historical events like the Great Depression.