Those of us born in the mid-50s still can recall the Great Depression of 1963-73. The trigger was obviously the Kennedy assassination. A wave of sympathy led the federal government to go on an orgy of spending, taxes, regulation, inflation, and price controls. Medicare and Medicaid was passed in 1965. The War on Poverty was launched. Affirmative action was imposed on business. Inflation soared, pushing people into higher tax brackets. Then LBJ raised income tax rates in 1968. OSHA began imposing burdensome regulations on business. Ditto for the EPA. The US left Bretton Woods, causing enormous uncertainty over monetary policy. By 1971 there were wage and price controls on the entire economy. What a god-awful mess!
Of course the period from 1963-73 was actually one of the greatest boom periods in all of human history. The question is why?
One answer is Adam Smith’s famous maxim: “There is a great deal of ruin in a nation.”
Or perhaps monetary policy drove NGDP up at a fast and accelerating rate. And it is monetary policy, not structural factors, that explains the business cycle.
Karl Smith recently expressed similar sentiments:
I don’t think Krugman is doing this, but it is easy to get too caught up in thinking the macroeconomy is an extension personal finance. Having bought a house you couldn’t afford seems like a really bad situation to be in, and if everyone is in that situation then it seems like that ought to be really bad for the economy.
However, keep always in the front of your mind that a recession is not simply a series of unfortunate events. A recession is when the economy produces less. For example, the AIDS epidemic in Botswana is a horrible event for millions of people that uprooted lives and destroyed families and promises to leave a generation of orphans.
However, Botswana’s GDP growth didn’t turn negative until Lehman Brothers went under.
That a Global Financial Crisis could do what rampant death and disease could not, is an important indicator of the nature of recession.
A recession isn’t when bad things happen, whether that’s loosing your house to foreclosure or your parents to AIDS. A recession is when the economy produces less.
Somehow you have to make a link between the bad thing happening and the economy producing less. I maintain that, that link almost always runs through the supply of money and credit.
Still think “the problem” is the cost imposed on business by Obamacare? Obamacare is “a problem,” as are many of the policies from 1963-73. In the long run they may be more important than the business cycle. But let’s not confuse policies that reduce the efficiency of the economy, with those that create business cycles.