Bounc­ing back from the Great Re­ces­sion

The Pak Banker - - OPINION - Noah Smith

DID the Great Re­ces­sion in­flict per­ma­nent dam­age on the U.S. econ­omy? Or was it just a deep hole that took a long time to climb out of? Ev­i­dence now says that it was mostly the lat­ter. Based on how fast the U.S. re­cov­ered from the 2008 fi­nan­cial cri­sis and the re­ces­sion that fol­lowed, the speed hasn't been too dif­fer­ent from that of other re­ces­sions dur­ing the past 30 years. Here, cour­tesy of Bill McBride, blog­ger at Cal­cu­lated Risk, is a chart com­par­ing job losses and re­cov­er­ies in var­i­ous U.S. re­ces­sions:

As you can see, the tra­jec­tory of the em­ploy­ment re­cov­ery af­ter the Great Re­ces­sion has been about the same as the re­cov­er­ies fol­low­ing the 2001 and 1990 re­ces­sions. The main dif­fer­ence is that the Great Re­ces­sion started with a deeper, more se­vere drop. In­ter­est­ingly, the cur­rent re­cov­ery has lasted longer than the post-2001 re­cov­ery -- eight years af­ter 2001, the U.S. was al­ready in an­other re­ces­sion, while the econ­omy is still ex­pand­ing to­day.

Other mea­sures also show that the econ­omy has mostly re­cov­ered. U6, the broad­est of­fi­cial mea­sure of un­em­ploy­ment -- which in­cludes marginally at­tached work­ers plus those who are em­ployed part-time for eco­nomic rea­sons -- is back down to the lev­els of 2004:

Of­fi­cial un­em­ploy­ment -- which doesn't in­clude the marginally at­tached or part-time work­ers -- is down to 4.9 per­cent, a low rate by his­tor­i­cal stan­dards. The steady re­cov­ery has mostly con­founded the pre­dic­tions of the so-called struc­tural­ists, who be­lieved that the Great Re­ces­sion caused the na­tion to tran­si­tion to a per­ma­nently weaker econom- ic foot­ing. Tyler Cowen of Ge­orge Ma­son Univer­sity, for ex­am­ple, re­cently lost a bet with his col­league Bryan Caplan over the un­em­ploy­ment rate. Cowen bet Caplan in 2013 that un­em­ploy­ment would re­main higher than 5 per­cent for 20 years. He was so con­fi­dent in the ex­plana­tory power of struc­tural fac­tors that he gave Caplan 10-to-1 odds on the bet. It took only 2 1/2 years for Caplan to pre­vail.

Al­though Cowen protested that the em­ploy­ment- to- pop­u­la­tion ra­tio re­mains low, much of this is due to the de­mo­graph­ics. The re­tire­ment of the baby boomers is re­duc­ing the frac­tion of the pop­u­la­tion that is of work­ing age. Oncewe ad­just for de­mo­graphic change, we find that the em­ploy­ment-to-pop­u­la­tion ra­tio has also mostly re­cov­ered from the Great Re­ces­sion.

This re­cov­ery is a vic­tory for main­stream macroe­co­nomics. It val­i­dates the idea that economies re­store them­selves nat­u­rally af­ter re­ces­sions -- es­pe­cially with help from mon­e­tary and fis­cal pol­icy. In re­sponse to the big shock of 2008, the fed­eral govern­ment in fact did ex­actly what text­book New Key­ne­sian mod­els say it should have done, run­ning large but tem­po­rary deficits, low­er­ing in­ter­est rates al­most to zero and us­ing un­con­ven­tional mon­e­tary pol­icy.

The re­sults weren't ex­actly what the text­books pre­dicted -- in­fla­tion, for ex­am­ple, didn't rise. But they were pretty close. The Great Re­ces­sion can be read as a qual­i­fied suc­cess story for the dom­i­nant paradigm in macroe­co­nomics.

How­ever, it is wrong to say that em­ploy­ment has com­plete­lyre­cov­ered. There are still some work­ers who didn't re­turn to the la­bor force af­ter 2008. They are small in num­ber com­pared with the ma­jor­ity that have re-en­tered the ranks of the em­ployed. But they do ex­ist. We can see, for ex­am­ple, that la­bor force par­tic­i­pa­tion for Amer­i­cans aged 25-54 has fallen a cou­ple of per­cent­age points from the highs of the late 1980s through the early 2000s.

La­bor econ­o­mists have also ob­served that the Bev­eridge Curve -- which mea­sures the re­la­tion­ship be­tween job va­can­cies and un­em­ploy­ment -- has shifted out, mean­ing that some com­pa­nies may be hav­ing trou­ble find­ing qual­i­fied work­ers to fill their needs. So al­though the U.S. has mostly re­cov­ered, we shouldn't ig­nore the small but real longterm wounds that a small chunk of the pop­u­la­tion has suf­fered.

Struc­tural fac­tors such as lower pro­duc­tiv­ity, dys­func­tional la­bor mar­kets, re­duced en­tre­pre­neur­ial dy­namism and bad pol­icy maybe be im­por­tant, but they aren't the heart of the story. And as for the last few dis­cour­aged work­ers, the U.S. should be mak­ing ef­forts to iden­tify them and get them back on their feet, while do­ing ev­ery­thing to en­sure that the U.S. re­mains a good place to run a busi­ness.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.