How is This Recession Not Like Other Recessions?
To follow up my post on this recession, I’d like to note something else that’s kind of odd about the recession. Regular readers know I think the Fed is often at least partly at fault for recessions when we get them. (I’ll be backing up this claim with data below, don’t worry.) That doesn’t seem to be true here. Sure, the Fed helped create conditions that led to the asset bubble… but it wasn’t involved in the conditions that led to the end of that bubble at this time, nor did it excessively tighten money.
OK. Let’s go to the data. Take Seasonally Adjusted M1 (which goes back to 1959), and adjust it for inflation. You’ll note that real M1 has been shrinking over time – cash has been getting less important over time. No surprise – in the last few decades, we’ve had the evolution of plenty of new methods of paying for transactions or saving, from checks to credit cards to shares of stock and exotic derivatives…
Between 1959 and 2007, there were a total of 588 months. 94 of those were spent in recession, or 16% of the time. If you consider recessions plus the twelve months before a recession, that’s 30.3% of the time. (Of course, I’m using the recession dates provided by the NBER. Also, the data and analysis used in this post can be found here.)
Now, there are 28 instances in which the Fed dropped real M1 by at least 3.5% from where it had been three months later. (Interestingly, it often happens in March… presumably, its good to have a lot of money sloshing around at the end of the year during Christmas season.)
Now, here’s the cool thing…. 17 of the 28 months where we observed a decrease of 3.5% or more from the month 3 months prior, or 61% of them, occur either during a recession or within twelve months prior to a recession. Another cool thing… there are seven recessions during this period, and every single one of them begins no more than 12 months after a time we observe a 3.5% decrease in real M1. Every single one. Its hard to conclude a big drop in real M1 doesn’t have something to do with recessions, both getting us into them and keeping us in them. Not all periods where we see such a drop are associated with recessions, but we’ll look at that in a moment.
Of these 28 instances in which the Fed drops real M1 by at least 3.5% in a 3 month period, Dems are in the Oval Office 15 of them, of about 54% of the time (Note that the President is a Republican 59% of the months in the sample as a whole… so we clearly aren’t seeing these big decreases in real M1 being randomly distributed.)
And here’s another interesting factette… what about those cases where we see this big cut in real M1 but don’t see a recession follow? It turns out that happens eleven times… and in eight cases there’s a Democrat in office.
So in terms of politics… what we see is that the Fed is much more likely to cut real M1 by a lot when there’s a Dem in office, and the economy has been much, much more likely to make it through such a cut in real M1 without suffering a recession when a Dem is in office. The end result, of course, is that the percentage of time that the economy is in recession when the President is a Republican is much higher than the percentage of time that the economy is in recession when the President is a Democrat.
Now, back to the current mess… since every single one of the seven previous recessions for which we can compute real M1 using data on the Fed’s website was preceded by a cut of 3.5% or more in the three month real M1, the natural question is…. is that true this time too? As with many things involving GW, the answer is… No. If there’s one recession that wasn’t at last partly triggered by the Fed, this one is it.
Which leads to my question from yesterday’s post, yet again – why are we seeing a recession now, at this time, so soon after the last one. The last time we see a recession so soon after the previous one, Reagan was in office. The last time we saw a President with two recessions in his term, Nixon was in office. Unless the last few decades have been a major aberration, an ordinary business cycle shouldn’t be bringing us to a recession so soon. So to repeat: why are we seeing a recession now, given that GW has gotten everything he’s wanted – tax cuts, help from the Fed, reduced regulation, even two wars (and remember – Conservatives and libertarians credit WW2 with ending the recession, not FDR)? Could the conservative or libertarian model have predicted such a thing?
To repeat… the data and analysis used in this post can be found here.
Update… Several edits made to improve readability or for increased clarity. Thanks to comments by DolB and Joel.