Professor Lazear on CNBC yesterday reiterates and unhedges his thesis that the causes of the 1980 and 1982 recessions are essentially the same as that of the 2007-09 recession.
Source: “SquawkBox,” CNBC, April 11, 2012.
Check at time index 2:08 minutes in, in response to the observation that the causes of the two recessions were different.
Joe:. the causes [of the two recessions] were different, too.
Lazear:They were, they were, but that’s not an obvious situation. When you think about people like John Taylor, he would argue that the causes are not so different. in fact, that the causes were misbehavior by the central bank. that’s a controversial position, as you know. but the point is that there were financial issues involved in the ’80-’82 recession…
Reader Jeff argues that I misconstrue because I omitted some dialog. I have added it now (in italics) so readers can decide for themselves.
I think the logical steps going from the observation that the financial crisis of 2008 was Fed induced (!) to the argument that the “causes” of the 1980/82 recessions and the 2007 recession were the same are of dubious merit.
Just a quick observation. The next post will be non-Lazear related.
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there were financial issues in the 80-82 recession
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In software it’s said that all problems can be solved by adding another layer of abstraction.
I think there’s something similar going on with statements like Lazear’s, ie, he alters the truth value of a proposition by moving from the specific to the general.
In Lazear’s construct the phrase ‘financial issues’ is coerced into carrying an unwarranted amount of freight.
It’s “controversial” in the sense that it is a lie and people don’t like liars.
Fed Funds rate = 19.10% in June 1981
Fed Funds rate = 0.15% in Jan 2009
Menzie: You are chasing ghosts here and I can’t figure out why. Did you happen to catch the discussion right before the part you quoted?
Joe: the causes [of the two recessions] were different, too.
Ed: they were, they were.
Jeff: I was taught that if you say “yes”, then “no” right afterwards, the last answer you give is the one you really mean…
In any case, the entire transcript is online, so I will let people judge. In fact, just to make you happy, I will add the portion you mention.
I remember the 1980 recession because I had closed on our new home in Oct. 1979 after a series of quick rate hikes had jumped the mortgage rate to 10.5%. Then they continued higher until the housing market collapsed. New construction stopped in our subdivision and basements were simply capped. Pulte Homes pulled out of Michigan after they were forced to finish the remaining homes and sell them at a 30% discount to the home I had just purchased. It was 10 years before housing prices came back to the 1979 level.
But you have to step backward and look at the oil-produced inflation that drove everything including the Fed’s response.
In 2007, the economy was already showing significant weaknesses, but the Fed ignored them and focused on the bogey man of inflation. The growing weaknesses were given a hard shove by the increasing Fed funds rates and the house of cards came down.
http://hallofrecord.blogspot.com/2007/07/its-economy-stupid.html
Lazear is right that Fed mismanagement created both crises that preceded the recessions: easy money created CPI inflation in the 1970’s, and easy money created asset bubbles and excess leverage in the 2000’s.
But the similarity ends there. The policy response was opposite: Volcker defended the dollar; Bernanke debased it. Reagan ran what then seemed like big deficits; Obama’s deficits make Reagan’s look trivial by comparison.
Reagan didn’t run debt past 100% of GDP; Obama did (at a 10% annual clip!). We’ll see how that works out for him.
Menzie: That’s weird because I don’t see a “yes” or a “no” in the excerpt. What I see is an acknowledgement that they had different causes and then a follow-up statement in which he points to similarities. But then again I tend to read things as presented.
Well an AD shortfall was the cause of both the Regan recession and the 2007-2009 recession, and the Fed controls AD…so…
Pretty mushy interview, I thought. No clear diagnosis of the problem, nor unambiguous policy recommendations.
My reading of what Lazear was trying to say is consistent with Jeff’s. But even on Menzie’s interpretation, I don’t understand what the concern is. For the sake of clarification, suppose the discussion went like this:
Joe: “the causes [of the two recessions] were different, too.”
Lazear: “They were, they were, but that’s not an obvious situation.
On second thought, I take that back. Taylor believes that fed mismanagement was the cause of both recessions. And although I acknowledge that this view is controversial, that’s what I believe too.”
What’s wrong with that?
Menze, do you dispute this statement: “When you think about people like John Taylor, he would argue that the causes are not so different.”
Would John Taylor argue that? I think that Scott Sumner would. Falling NGDP, right?
You’re hilarious. I was listening to CNBC on the way in to work yesterday, and I thought, “I wonder if Menzie is going to post about this, it is his favorite economist of the moment!”
Buzzcut: Why do you repeatedly cite this guy as if he’s the best thing since sliced bread? Or am I to infer you cite him because you think we view the world in the same way?
On a separate note, let me reciprocate your assessment of me. I always look forward to your comments because they give me equal, if not *more* amusement.
lol, Reagan’s deficits were higher than Obama’s when comparing it to the size of the economy. Don’t forget, the 2009 budget was not Barak’s.
Anyone that can’t figure that out should be ashamed for themselves.
Recessions are the predictable nature of capitalism. “Blaming” it on someone is useless. Some recessions are worse than others. The paper money boom that got going in 2003 crashed like the paper money boom did in the 1830’s, 1870’s, 1890’s, eh, you get the picture.
Recessions have been with us since the beginning of capitalism, and there’s no reason to think that’s going to change. One can argue that the 1980/82 recessions was driven by the Fed (i.e., hiking rates to reduce inflation). You can argue a la Scott Sumner that the 2007-2009 recession was much worse because the Fed let NGDP fall off a cliff. There’s also plenty of factors that were different in each of the recessions. As usual in macro, there’s enough gray area to go around to make any argument you think appropriate (or attack any one that annoys you).