Modern Macro Policy: Does it accelerate recoveries?

David Bath in a comment to this post asked if the fiscal stimulus package is likely to accelerate the recovery. I don’t know the answer for sure. So, I did what I always do: I pulled historic data.

The United States in the 19th century was a haven of Laissez Faire economic policy. There was, most of the time, no central bank and there was no coordinated counter-cyclical fiscal policy. Event the automatic stabilizers, such as unemployment insurance, were virtually nonexistent prior to the 1930s.

I thought about comparing recoveries in the 19th century to recoveries in the 20th century. If macroeconomic policy is effective then I would expect to see faster and more robust recoveries in the 20th century. (You won’t believe me, but I really did expect to find this result.)

The picture below shows the acceleration of GDP growth following a recession. The bars represent the average growth rate over the four years after a downturn in industrial production divided by the average growth rate over the preceding four years. A number of 15 percent implies that growth was 15 percent faster in the four years after the recession. (The results do not change substantively if two or three year intervals are used instead.)
The first two bars use the Federal Reserve’s IP series aggregated to annual frequency. Over the entire series, 1921 to 2008, GDP grew 30 percent faster following a recession than in the years immediately preceding the slowdown. This number is driven by the 1930s. If the sample is shortened to examine only data from 1960 forward, the increase in growth is closer to 15 percent.

The second data series use available on the NBER website (here) and were compiled for Joseph H. Davis An Annual Index of U.S. Industrial Production, 1790-1915 Quarterly Journal of Economics (November 2004). This industrial production data set runs from 1790 to 1915. The average increase in growth was almost 20 percent over the entire sample and around 26 percent in the post Civil War sample.

I often use the NBER Total Physical Production series (here). The last column shows the results from this data set: around 15 percent.

Another way to cut the data is in the average length of recessions. The chart below shows the average duration, in years, of the each downturn in IP. There is startlingly little difference in average duration, less than 1/3 of one year over all of the different cuts at the data. Of course, this is annual data and I cannot necessarily tell the difference between a 13 month and a 23 month recession.

It’s amazing that in the era of modern macro policy recessions do not end in more robust growth than in the era before macro stabilization. Of course, this result could itself owe to successful stabilization policy. If downturns are less severe, the rebounds might be less robust. Nonetheless, the similarities across time raise questions in my mind.