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Jeffrey Frankel is James W. Harpel professor of capital formation and growth at Harvard Kennedy School. He also serves on the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, which declares when the United States is in a recession. The Committee recently met and determined that the economy has not yet reached the “end of contraction and the beginning of expansion.” Below, Professor Frankel offers his individual perspective on the recession.
Q: You recently stated on your blog that "the recession is over." What signs indicate that to you?
A: Growth was strong in the second half of 2009, and pretty clearly was positive in the first quarter of this year as well. The labor market has lagged behind, as is common, but in October the total hours worked by the labor force began to increase again, followed by employment. Thus there is a high probability that the economy reached its trough (or low point) in mid 2009. But it is very important to note that a trough could as easily be described as "the economy is at rock bottom" as the more positive-sounding characterization "the recession is over." A recession is defined as a period of decline in economic activity, not a low level of economic activity. Another qualification to note is that in the hypothetical and unlikely event that the economy went back into a steep nose dive tomorrow, we would probably have to call that a continuation of the same recession rather than a new one.
Q: What role, if any, did fiscal stimulus play in ending the recession?
A: Constraints arising both from party politics and from the magnitude of the inherited debt prevented the fiscal stimulus enacted February 2009 from exceeding $800 billion. Thus it was not large enough to produce a rapid return to full employment. Nevertheless, I believe that the fiscal stimulus (together with Federal Reserve monetary policy and other important policy responses) was well-designed, by the standards of most such efforts, was probably critical in heading off the risk of a Great Depression scenario, and probably contributed substantially to the end of the recession. Of course some observers disagree, in part because it is impossible to prove what would have happened without the stimulus.
Q: Banks were at the heart of the financial crisis. Do you think the financial sector is now stable?
A: The crisis was remarkable in that the liquidity dried up in what were supposed to be the most liquid markets in the world. The malfunctioning of the interbank credit market was easily quantified by the tremendous increases in the TED spread (the difference between interest rates on Eurodollars and Treasury bills) and other measures of the premium that even the largest most secure banks had to pay in order to borrow. These spreads have returned to normal over the last year. Although one cannot rule out new shocks, and the construction sector in any case will recover only slowly, it is indeed fair to say that the financial sector where the crisis originated has stabilized.
Q: Is the most recent recession the worst since the Great Depression?
Yes. The early 1980s come close; if the criterion is the level of the unemployment rate rate then 1982 was worse than the current episode. But by the various other measures -- increase in unemployment rate, loss of jobs, loss of output, length of recession -- the 2007-09 recession was indeed the worst since the Great Depression.