Calling this the “worst economic expansion since World War II” is like saying the ebola virus is the worst cold you ever had. At some level you might be technically correct, but you end up communicating confusing, even misleading, information.
This keeps coming up, despite a wealth of evidence that provides more appropriate context about the crash and subsequent recovery. A column in Real Time Economics is typical of the genre:
Since the recession ended in June 2009, the economy has advanced at a 2.2% annual pace through the end of last year. That’s more than a half-percentage point worse than the next-weakest expansion of the past 70 years, the one from 2001 through 2007. While there have been highs and lows in individual quarters, overall the economy has failed to break out of its roughly 2% pattern for six years.
The key that something is wrong is in the outlier status of the data. “More than a half-percentage point worse than the next-weakest expansion” is an enormous, Bob Beamon-like smashing of the earlier record. To better understand this data requires some context, which today’s column will provide.
First, the specifics: By just about every economic metric, this has been a mediocre, subpar recovery. For the first few years following the end of the recession in June 2009, employment increased slowly. Wages to this day have been little changed. Retail sales have been inconsistent; housing has seen soft sales numbers, while price increases have been a function of a lack of inventory caused by limited amounts of home equity and immobility as consumers try to reduce debt. Gross domestic product growth has been weak and lacking in consistency.
The context is simple: When we discuss expansions, we typically are referring to the later half of a typical economic contraction-expansion cycle. That is what is typically referred to as a post-recession recovery.
However, that huge outlier is a clue that we are using the wrong data set. The post-World War II recession recoveries are the wrong frame of reference; the proper one is the much more severe set of credit-crisis collapses and recoveries.
Economists Carmen M. Reinhart and Kenneth S. Rogoff figured this out before the scale of the crisis even was apparent. In January 2008 they published a paper titled “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison.” They warned that the U.S. subprime mortgage issue was turning into a full-blown credit crisis, not just a typical recession. I discussed this extensively in February 2008.