Worried about a recession – don’t blame free trade

In recent decades, as foreign trade and investment have been rising as a share of the U.S. economy, recessions have actually become milder and less frequent, says Daniel Griswold, director for the Center for Trade Policy Studies at the Cato Institute.

The softening of the business cycle has become so striking that economists now refer to it as "The Great Moderation." The more benign trend appears to date from the mid-1980s. As a recent study from the Federal Reserve Bank of Dallas found:

On average, the five recessions from 1959 to 1983 were 47 months apart, lingered 12 months and were associated with a 2.17 per cent peak-to-trough decline in real gross domestic product.

By contrast, the 1990 downturn came after 92 months of expansion, lasted eight months and involved a 1.26 per cent decline in gross domestic product.

The 2001 slump ended a record 120 months of uninterrupted growth, lasted eight months and involved a GDP decline of only 0.35 per cent.

More generally, quarterly growth in both real GDP and jobs became markedly less volatile after 1983.

The Great Moderation means that Americans are spending more of their time earning a living in a growing economy and less in a contracting economy:

According to the National Bureau of Economic Research (NBER), our economy has been in recession a total of 16 months in the past 25 years, or 5.3 per cent of the time.

In comparison, between 1945 and 1983, the nation suffered through nine recessions totalling 96 months, or 21.1 per cent of that time period.

In any given month, the country was four times more likely to be in recession in the post-war decades before 1983 than since then.

And even if the U.S. economy has already entered a recession in 2008, the expansion that began after the 2001 recession would have lasted six years – making it the fourth-longest expansion since 1945.

Source: Daniel Griswold, Worried about a Recession? Don't Blame Free Trade, Cato Institute, March 31, 2008.

For text: http://www.freetrade.org/node/856

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 08 April 2008