Who to Credit for the U.S. Expansion? Maybe George W. Bush
(Bloomberg Opinion) -- As the U.S. economic expansion approaches a record, there are some big questions being asked out there. Is it too good to be true? Did capitalism kill inflation? Does President Donald Trump deserve more credit than former President Barack Obama? And, most alarmingly, will the nation pay for the longevity of this expansion with an equally lengthy downturn?
Many economists who have studied the relationship between expansions and recessions have subscribed to what is sometimes called the forest-fire theory of the business cycle. If you think of the economy as a forest -- and recessions as cleansing fires -- it makes sense that the more tinder that builds up, the worse the inevitable conflagration.
In more technical terms, the theory’s proponents argue that inefficiencies creep into economic relationships as expansions persist. These inefficiencies -- such as mediocre employees hired during periods of labor shortages -- will come back to haunt the economy when the expansion finally ends. Ditching all those bad hires causes a dramatic spike in unemployment, exacerbating the downturn -- or so the theory claims.
If you’re prone to viewing the business cycle as a morality tale, the theory makes intuitive sense. The longer we live high on the hog, the worse the inevitable reckoning. But what if that view gets things precisely backward? What if it’s the duration of the recession that determines the length of the expansion, not the other way around?
Earlier this year, a study by two economists connected with the Cleveland Federal Reserve supported this view with national- and state-level data.
They found that the severity of recessions -- as measured by changes in unemployment rates -- had almost no relationship to the strength of the expansion that preceded it. In other words, they found little evidence to sustain the forest-fire theory.
But when they ran a regression analysis on the connection between the severity of the recession and the strength of the expansion that succeeded it, they did find a very positive correlation. The more time spent in the throes of a recession, the study found, the greater the likelihood of a sustained expansion afterward. Scorched earth yields to extensive regrowth.
But this first analysis depended on national-level data, which tends to obliterate subtle distinctions between state and regional economies throughout the country. After all, the fifty individual economies that make up the larger national economy do not move in lockstep.
As a follow-up, the authors therefore examined state-level data from 1976 onward, which provided considerably more case studies. While there have been four national recessions since that time, nearly half the states have had more than four recessions in that same period.
Once again, the authors found almost no evidence for the idea that the bigger the expansion, the worse the recession. If anything, the lack of a relationship was even more pronounced. But when they examined the reverse, they found an even stronger correlation between the severity of a recession and the strength of the recovery that followed.
What this suggests, then, is that the record expansion we’re enjoying right now is a direct consequence of the bloodletting the nation experienced during the Great Recession of 2008 under President George W. Bush. That, not the policies of Obama and Trump, set us up for our current prosperity.
At the same time, the current expansion is unlikely to end in disaster merely because we’ve had it so good for so long. It may be a bad recession; it may be mild. But if this recent research is correct, whatever happens won’t be a direct consequence of our current, seemingly never-ending era of prosperity.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.
©2019 Bloomberg L.P.