Hummel on Recessions and Banking Crises
By David Henderson
Monetary economist and economic historian Jeffrey R. Hummel has done a real service by putting together a table, with surrounding discussion, that gives the dates of major recessions. He also gives, for each recession, whether it was accompanied by a bank panic or suspension and also whether it was accompanied by numerous bank failures.
But why put together a table of recessions when the National Bureau of Economic Research, the generally agreed on arbiter of recessions, has already done so? Why, in short, reinvent the wheel? Hummel’s argument is that the wheel is broken. (Those are my words, not his.)
I have almost entirely confined the list of major recessions to those constituting part of a standard business cycle, omitting periods of economic dislocation resulting from U.S. wars or government embargoes. For the number and dating of recessions from 1948 forward, I have exclusively followed the National Bureau of Economic Research (NBER). But prior to 1929, the NBER notoriously exaggerates the volatility of the U.S. economy. Moreover, between 1929 and 1948, the NBER reports a post-World War II recession lasting from February to October 1945 that no one was aware of at time, as easily confirmed by looking at the unemployment data as well as contemporary writings. Richard K. Vedder and Lowell E. Gallaway (1993) pointed out in their neglected study of U.S. unemployment that this alleged postwar recession is a statistical artifact that varies in severity with the regular comprehensive revisions of GNP/GDP estimates by the Bureau of Economic Analysis (BEA). The BEA’s original estimates showed only a minor downturn, subsequent revisions converted it into a major downturn, and the latest comprehensive revision of 2013 have reduced its magnitude, although not to the level of the BEA’s original estimates.
I saw his point up close a few years ago when I was researching my Mercatus study “The U.S. Postwar Miracle.”
According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone’s idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?
If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about “the postwar boom.” They saw it as a time of prosperity.
In my piece, I delve in a different way into why the GNP data are so off. Jeff does it above. The two methods are complimentary, not contradictory. We both, though, point to the same statistic, which is awfully hard to ignore: the low unemployment rate. I point out that the unemployment rate during the 1946 “recession” never even got as high as 4 percent.
Back to Jeff’s post. He points out that it is very hard to make a case for the Federal Reserve as a stabilizing force, even if you throw out its biggest mistake: the Great Depression. He writes:
Once the Great Depression is thrown out as a statistical outlier, we observe no significant change in the frequency, duration, or magnitude of recessions between the period before and the period after that unique downturn. Given that the Great Depression witnessed the initiation of extensive government policies to alleviate depressions and that the Federal Reserve had been created fifteen years earlier explicitly to prevent such crises, this overall historical continuity with a single exception indicates that government intervention and central banking has done little, if anything, to dampen the business cycle.
He ends thus:
In short, the widespread belief among economists, historians, and journalists that the Federal Reserve was an essential, major improvement appears to be no more than unreflective faith in government economic management, with little foundation in the historical evidence.