Comparing Economic Recoveries after a downtown

(Notes and comments sparked by an article in the Economist, 8/11/12, p.24)

Mr. Romney frequently compares the roaring recovery during Mr. Reagan's Presidency after the recession in the early 1980's with the tepid recovery that has followed the economic collapse of 2008-09 in arguing Mr. Obama has done a poor job.

The Economist notes it is a poor comparison.

The recession in the early 1980's was a result of high interest rates by the Fed trying to control inflation - at one point short term interest rates were at about 20%.  When inflation dropped, the Fed relaxed interest rates - dropping the short term interest rate by 12% in a fairly short period of time - followed by  the government starting to spend lots more money (defense spending under Mr. Reagan's arms race acceleration seeking to break the economy of the Soviet Union).  It was the perfect recipe for a booming recovery, much lower interest rates for businesses that had been starving for funds to borrow and invest, coupled with lots of Government spending to drive up demand for goods and services.

This downturn, on the other hand, has been characterized by extremely low interest rates because the private sector is already deeply in debt so there is not enough private sector demand for credit.  Couple that with major spending cuts in government spending at all levels and what you have is the worst possible recipe for jump starting growth. 

One other factor the Economist doesn't touch on is the difference in the population dynamics between the early 1980's and the current period.  In the early 1980's the biggest single age group in our population, the baby boomers were moving into their most productive and acquisitive years.  They (including me) are now moving into retirement, are less productive, less willing to take on debt to acquire things.

The Economist notes that Mr. Romney recently said Mr. Obama's suggestion for more stimulus for the economy was "a bad idea".  The Economist concludes by drolly noting that Mr. Romney's views on more stimulus " might evolve... if Mr. Romney wins the White House."