Monday, January 14, 2008

What ends recessions?

Asks and answers Tom Firey:

The definitive historical review of U.S. government responses to recession is Christina and David Romer’s 1994 NBER Macroeconomics Annual paper “What Ends Recessions?” [$]. The Romers examine each U.S. recession from the end of World War II to the article’s publication date (that is, the recessions of 1954, 1958, 1960, 1970, 1975, 1980, 1982, and 1991) and determine what government actions were taken in response and how successful those actions were.

Government response to recessions comes in three forms: monetary policy (the Federal Reserve’s Open Market Committee lowers interest rates to spur investment and borrowing), automatic fiscal policy (the automatic increase in government spending during recessions that results from increased unemployment insurance claims, welfare disbursements, etc.), and discretionary fiscal policy (the adoption of stimulus packages that contain increased government spending and/or tax cuts).

The track records for both FOMC action and the automatic stabilizers are strong, the Romers show. Both kick in quickly when recessions begin, and the economy turns around fairly soon afterward.

Stimulus packages have a much shoddier record, however: they take months to move through Congress, and additional months to implement — long after the recession has come and gone. Moreover, many of the specific actions initiated by stimulus packages are hardly stimulatory — extending unemployment benefits or launching major government construction programs requires several months to several years (and sometimes even decades) before the federal monies hit the economy.


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