Recession Prevention Handbook: Eleven Case Studies, 1948-2007

Published by EH.NET (October 2010)

Norman Frumkin, Recession Prevention Handbook: Eleven Case Studies, 1948-2007. Armonk, NY: M.E. Sharpe, 2010. xxvii + 379 pp. $50 (paperback), ISBN: 978-0-7656-2284-6.

Reviewed for EH.Net by Robert Stanley Herren, Department of Economics, North Dakota State University.

The title of Norman Frumkin?s book well describes his objective of developing policy recommendations to prevent future recessions by studying the causes of the eleven recessions the National Bureau of Economic Research (NBER) has indicated that have occurred since 1948. In chapter 1, Frumkin outlines his approach and discusses the data that he will use. Each of the next 11 chapters is devoted to analyzing the onset of a specific recession. In the final chapter, Frumkin presents his findings and recommendations.

Frumkin believes that his major contribution is his use of real-time data. That is, he presents data that would have been available to policymakers when they were making policy rather than data that had been revised over time. To obtain information about the ?real-time? thinking of policymakers, he read the minutes of the Federal Open Market Committee (FOMC) and the Council of Economic Adviser?s (CEA) Economic Report to the President. He also provides information from other contemporary researchers and forecasters.

For each recession he provides (mostly in charts rather than in tables) data on employment, unemployment, inflation, industrial production, housing starts, worker earnings in manufacturing, interest rates and bank loans, consumer durable goods spending, and gross national product (gross domestic product for the last two recessions). He uses this sequence of indicators because he believes this was the order that policymakers would consider; this sequence does not represent Frumkin?s theory of business cycles. Because he briefly describes each indicator in each chapter, readers do not have to read the chapters in sequence but instead can read about the specific recessions that most interest them. For the reviewer who reads the chapters in sequence, there is substantial repetition.

Frumkin admits that the data are often ambiguous prior to the onset of a recession (as defined by the NBER). Although the data generally indicated a sluggish economy, some indicators signaled a stronger economy and most indicators exhibited substantial month-to-month fluctuations. In other words, it would have been difficult for policymakers to conclude definitely that the recession was going to occur. He states that the FOMC and Congressional Budget Office never publicly predicted a recession while the CEA only once (1979) predicted a recession. In other words, he demonstrates that the data and recognition lags often prevent a timely response of monetary and fiscal policymakers.

Nonetheless, Frumkin concludes that monetary policy was a ?precipitating? factor in nine of the eleven recessions since 1948 with the exceptions being the recessions in 1969-1970 and in 1990-1991. He argues that the Federal Reserve too often has been overly concerned with inflation and has worried about excess aggregate demand when substantial economic slack existed. Because he does not view excess demand as the primary cause of inflation since 1948, he sees contractionary monetary policy as a ?blunt, inefficient, and unethical tool? (page xxiii).

Frumkin?s conclusions arise from several assumptions which many economists may consider to be controversial. He notes that President Kennedy?s Council of Economic Advisors estimated in 1962 the full-employment rate of unemployment at four percent. Frumkin uses this four percent unemployment rate as a measure of full employment throughout the rest of his book. However, later CEAs revised upward the estimate of full-employment rate of unemployment; between 1981 and 2009, the CEAs? estimates usually were between five and six percent. It is not surprising that Frumkin sees economic slack where contemporary policymakers saw the danger of excessive aggregate demand which would result in rising inflation.

Rather than inflation resulting from excessive aggregate demand, Frumkin believes ?that inflation is primarily caused by non-demand factors … these include the psychology of inflationary expectations by business workers, outsized speculation in the asset prices of stock equities and houses, and supply shocks? (page xxii). Frumkin notes that rising inflationary expectations could result in a wage-price spiral that policymakers needed to combat. However, he does not link these inflationary expectations to either past or to anticipated monetary policies. Thus, he does not see a contractionary monetary policy as a way to reduce inflationary expectations. Instead, he prefers to use wage-price policies including mandatory wage-price controls as the method to reduce inflation. For example he recommends that the president ?institute price and wage controls/standards when inflation accelerates at high rates and when the inflation is not driven by excess demand in the economy? (p. 354). He does not acknowledge that most economists who have served in the executive branch since 1980 disagree with this recommendation.

His discussion of recent ?bubbles? in asset prices criticizes the Federal Reserve for not raising margin requirements to reduce speculation in the stock market; he does not provide references to the debate concerning the effectiveness of this Federal Reserve tool.? Moreover, he ignores the debate regarding the role of overly-expansionary monetary policy as being a primary cause of bubbles in asset prices.

Frumkin considers presidential actions to be a contributory factor in five of the eleven recessions, primarily in 1969-1970 and in 1973-1975, 1980 and 1981-1982. In the first case, Frumkin sees President Johnson as being slow to request a tax increase. The last three cases reflect Frumkin?s attitude regarding the effect of wage-price policies. He criticizes President Nixon for phasing out the mandatory wage-price policies too quickly, President Carter for phasing out the voluntary wage-price policies too soon, and President Reagan for not asking Congress for authority to impose mandatory controls.

His criticism of Congress is limited to recommending that it should increase its oversight of the Federal Reserve but allow it to remain operationally independent. He states ?substantive congressional oversight of the Federal Reserve can raise important policy issues for the Fed to consider in its policy actions.? Highlighting the need for the Federal Reserve to look at alternative policy actions is not political interference? (p. 356).

In summary, Frumkin expertly presents real-time data and real-time analysis by policymakers to show the state of the economy prior to the onset of eleven recessions. His conclusions and policy recommendations challenge much of the conventional wisdom of recent macroeconomic policymakers.

Robert Stanley Herren is Professor of Economics at North Dakota State University. His current research involves examining the economic ideas of the Council of Economic Advisers.

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