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Double Dips

Aug 7, 2011 • 226 Views

We do not know whether a double dip has begun. Cascading during 2008 and the first half of 2009, the GDP then began to climb. Only if it drops again will we have a double dip. In the NY Times, financial journalist Floyd Norris does a beautiful job of comparing the 1980/82 double dip with now.

1980-82:

In 1980, inflation was the culprit. But then, attempts to control rising prices by restraining consumer credit so diminished economic activity that policy makers reversed course. Growth resumed but so too did inflation.

Responding, the new Fed chair, Paul Volcker, tried some politically unattractive economic discipline. Strangling lending, percent by percent, the Fed raised interest rates until the prime touched 21.5%. By 1982, we had a new recession. Still though, with inflation his target, Volker’s interest rate arsenal took aim until he was successful. By 1984, inflation was down to 4.1% from 13.6% and GDP was growing at a 7.2% rate.

2011:

Now, like 1980, government’s initial policies are not curing our economic ailments. We still face a housing problem, we still lack robust expansion, we still have high unemployment. Perhaps, like 1980, government might need to resort to more unattractive economic discipline because it has used up the more appealing weapons in its economic arsenal.

Maybe, also like 1980, we face the threat of a double dip. Here, you can listen to Merle Hazard sing “Double Dippin.”

The Economic Lesson

A recession is the period between a peak in economic production and its trough. Imagining a “u”, it is the left side, the trip downward. In economic terms, as we travel down the left side of the “u”, the GDP is either growing more slowly or actually diminishing. While most of us say that a recession is defined as two consecutive quarters of declining GDP, the NBER tells us that the quarters do not have to be next to each other.

An Economic Question: Looking at the data in Table B-4, here, in The Economic Report of the President 2011, since 1980, how many recessions has the U.S. experienced?

 

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