🚀 go-pugleaf

Let me add only this synopsis of a panel discussion at last week's American 
Economic Association meetings.  The title was "What Caused the Recession of 
1991-92?".  Chairing was Ray Fair;  panelists were Olivier Blanchard, Robert 
Hall and Edward Prescott.

Blanchard's hypothesis:  The recession saw a large swing in consumption 
expenditures, far more than the 1980-82 recessions.  There was also a fall 
in investment expenditures, but that was much milder than the consumption 
swing.  The result of a fall in consumption is that the recovery is far 
smaller than are recoveries from investment-led recessions.  (My own reading 
would be that this fits the 1975 recession as well.)

Hall's hypothesis:  Hall presented eight possible explanations of the 
recession, none of which he found completely satisfactory.  The eight were:
	-- Price shocks, such as oil.  Please note the oil price rises came 
after the onset of the recession.  (Beware:  Deluge of statistics may follow 
a flame on this point!)
	-- Unaticipated money supply change.  "Why would Greenspan not 
announce he had reduced target growth?" asked Hall.
	-- Contractionary fiscal policy.  There was no change in real 
spending.
	-- Tax rates increased.  Sorry, Robert Bartley, but rates did not 
change greatly, though collections did.
	-- Technology shock.  See Prescott hypothesis, below.
	-- Credit crunch.  Hall argues that for this to have real effects, 
there had to be a regulatory change in this period.  (My note:  I would 
argue that a change in enforcement of the same regulation is equivalent to a 
change in regulations with the same enforcement procedures.)
	-- World economy.  But this was growing in 1990, Hall said.
	-- Spontaneous decline in consumption, e.g., the Blanchard 
hypothesis.  Hall commented that while there were negative shocks in 1990, 
there were positive shocks in 1988 that may have lengthened the fat years 
out to seven.  It clearly had an effect, Hall concluded, but doubted it 
could explain the magnitude of the decline.

Prescott hypothesis:  There were a series of small productivity shocks that 
occurred in 1990, idiosyncratic and thus unexplainable, that were capable of 
producing the size of the recession we experienced.  Gary Hansen and he 
developed a real business cycle model that, based on starting values set in 
1987 (which they consider an appropriate base year) is capable of generating 
these types of cyclical behavior.  In particular, labor productivity fell 
before the recession.  Hall notes that the size of the producitivity decline 
was too small to explain the GDP changes;  Prescott did not agree.