Mark Skousen, the editor of Forecasts and Strategies, and the proprietor of FreedomFest (where I’ll be speaking on multiple topics this July) sent me the above graph, highlighting just how very jobless this recovery has been, even compared to what we saw after the severe recession of 1981. (There’s been nothing nearly as bad in the intervening three decades.)
What accounts for the difference? The glib answer is “Obama versus Reagan”, but there are plenty of alternative stories. I find some of those stories more convincing than others, but the one thing I’m sure of is that I haven’t put in the kind of hard thought or careful study that entitles me to a strong opinion. I’d be interested, though, in hearing what you guys think.
The glib answer ignores the fact that employment loss was already worse than ’81 before Obama came into office.
I’m outta my league on this one, but here’s one difference between the two recessions:
The one in the ’80s was caused by Volker raising the federal funds rate to deal with the inflation of the ’70s. The Fed could then lower the rate at will when inflation ceased to be a problem.
Our current unemployment rates peaked with the rate near zero. That made fine-tuning by the Fed difficult, and we’re left with solutions like stimulus programs that either don’t work or work slowly.
But I’m sure it’s more complicated than that. (I miss the easy stuff, like buying scones with a capital-gains tax; It’s too early for me to really think!)
The folklore is that employment started lagging GDP and Industrial Production more starting with the 1991 recession. Using the start of the recession as the start date on the fig may be misleading if the recessions had diff lengths. Why not start with the trough? Here’s a nice app that allows you to do both:
http://www.minneapolisfed.org/publications_papers/studies/recession_perspective/
Ah, I see you used the same app. Click on “Compare Recoveries.” It’s clear something changed with the 1990 recession.
-raising minimum wage 40% from 2006 levels when competitive international wage for low skilled labor is $1/hr.
-previous level of employment was from over allocated resources to housing. housing has not recovered (and should not recover). sectoral shift from housing to other industries is difficult.
I’ve read that vulnerability to unemployment shocks in the US increases from the primary to secondary to tertiary sectors. Of course jobs generally shift from primary & secondary to tertiary, so that isn’t an argument for going back to a higher proportion of primary & secondary jobs.
If that’s true, then industrializing could make the countries more vulnerable to unemployment. I don’t know that I believe it though, how much shift was there in these sectors in the last 30 years? I haven’t really looked.
I wonder if what really happens is the dominant sector takes the higher proportion hit. The smaller sectors may be less vulnerable because they’ve already been stripped to the essential jobs (or only essential jobs have grown in those sectors).
Anyhow, just an idea.
Increased labor force heterogeneity would be my best uneducated guess. When the labor force is relatively homogeneous, less job retraining is necessary to find a job following a recession. Now that the labor force is much more heterogeneous, more job retraining is required to find a job following recessions. Some possible supporting evidence for this theory is the massive spike in enrollment in for-profit schools – which tend to specialize in training students to work in specific sectors.
We should probably require that an answer to why the recovery from the current recession is a jobless recovery is also able to explain why the recovery from previous recession was also a jobless recovery – while blaming Obama may be emotionally satisfying, it doesn’t fit this criterion.
My guess is that this isn’t a recovery at all. A recovery requires a re-allocation of resources from the previous malinvestments to more productive uses. The Govt has been doing a brilliant job of keeping the malinvestments alive. The problem is looking at the world through a Keynsian lens means that the focus is on increasing “Y” in the Y = C + I + G + X – M equation.
So they focus on increasing “C” (the depletion of resources) and “G” (the inefficient use of resources) by borrowing and printing like there is no tomorrow.
I’m probably all over the place as well here but I’m guessing that there is a huge debt deflation occuring now that wasn’t happenning in the 80’s (or happenning to a far less degree). I can’t really remember that far back as I was only 4 so relying on reading about it.
Steven – I thought this would be right up your alley of understanding. The biggest thing I got from reading your work is how critical prices are and how lethal price manipulation is.
A radio program I was listening to (unfortunately, I don’t remember which) made the argument that job growth will require some combination of consumer spending and export growth. We haven’t seen strong export growth due to this being a global recession, and of course globalization driven competetion from less expensive suppliers. I don’t recall how globally distributed the 1981 recession was. And while we have recently started to see some growth in domestic consumer demand, some predict that it will remain low until consumers rebuild their asset values lost in the combined stock market and housing crash.
So, in summary, the distinction is driven by the nature of the recessions. 1981 was forced by Volker to bring down inflation, while the current was driven by an asset crash.
Also, of course, there doesn’t need to be a correlation between GDP growth and jobs growth, as GDP growth can be driven by increased productivity, which is, in the long run, better for the economy than jobs growth on its own. After all, the Western European countries with full employment policies, such as France and Germany, are seeing lower GDP growth because keep people unproductively employed supresses productivity growth, and ultimately GDP growth.
I agree that I lack data to have a strong opinion. One question I think might shed light would be “what were those jobs in the upswing part of the 80s recovery?” If those jobs existed in sectors that were already weak and not producing jobs prior to the Bush recession then it’s not surprising they don’t appear now.
I would also question the definitions used (the baseline) for judging recovery in both cases. I know that the definition of unemployment has changed drastically in the intervening decades and I find myself wondering if this is at all an apples-to-apples comparison. If the entire notion of “recovery” is based on differently computed formulae then how do we compare the two curves?
Finally, the question may be helped by a mathematical formulation of the two curves. Ignore the black dot for a moment and compute the slope of the curve on the downside of the ’81 curve – how does that slope compare with the slope of the upside? Then do the same comparison on the other curve – to my naked eye it appears that the slope of the red curve is much more steep. If that’s so then the question is whether the upcurve will match either the downcurve’s slope or the upcurve of the other line – something for which we don’t have data it seems.
Does the fact that you’re fighting a hugely expensive war have any bearing on this?
EricK: Probably not
http://washingtonindependent.com//home6/landsbur/public_html//home6/landsbur/public_html/wp-content/uploads/2010/02/DODGDP.jpg
My guess is that it is the uncertainty among entrepreneurs that they will have to forfeit a lot of their earnings to the government at all levels. The Obama administration as well as many local governments have demonized businesses and businessmen, with politicians now viewing them as ATM machines rather than recognize them as the producers of our wealth.
Could policy uncertainty on energy policy and the effects of the recently approved health care reform have anything to do with the sluggish recovery?
How about tax policy? Does the prospect of higher taxes hinder a recovery?
I’m not going to advance any hypothesis, I’d just like to express my appreciation at the high signal to noise ratio of these comments.
How do you determine the point of recovery?
Josh: I believe the point of recovery is the point at which output stops falling.
http://research.stlouisfed.org/fred2/data/GDPC96.txt
Steven: The NBER no longer marks the start of a recession as the point when the economy first shrinks for 2 quarters, so they may no longer count the trough as the end either. Not that one needs the NBER for recession marking, but they no longer use clear markers. Note that the GDP peak was in the first quarter of 2008, while the NBER dated it to the last quarter of 2007. Looking back to the recession of 2000/2001, you will see that the economy never once shrunk for 2 quarters, but NBER called one anyway.
Back to your blog post question. The speed of this recession once it really gelled with the collapse of Lehman and a more than 50% stock market drop put a grip of fear on this country that I have never seen in my 44 years (outside of the one week right after 9/11). Consumers and business owners alike were really shaken and took a long time to get out of siege mode. Think back to a 12 or 14 months ago. Businesses were not halting capital investments because of a fear that future tax rates might rise, rather they were fearing illiquidity and bankruptcy.
Monetary policy accounts for the difference. The Federal Reserve allowed aggregate demand to plummet during the recession unlike anything seen since the Great Depression. Aggregate demand is picking back up and employment should begin to recover. Anyone care to make a prediction on the April US seasonally adjusted payroll employment numbers? I guess 120,000 jobs.
I don’t think 1981 is a good comparison, except to show contrast. The early 1930s would be the right comparison to show the other side. Now, I’ve read some explanations about why jobs don’t recover when “recovery” begins from a GDP point of view, but to make sense of how those apply to this chart, I think I want to know what exactly this chart is charting. What is the definition of “employment” here? Percentage of some section of the population (such as “the work force”) or actual numbers? Adjusted for change in population over the course of the time graphed, or absolute? etc.
Tom,
How does the federal reserve control aggregate demand?
Er, wouldn’t the correctly glib answer be “Bush versus Carter”?
Ken,
The Fed doesn’t control aggregate demand but does control the monetary base which effects aggregate demand. The equation of exchange is MV=Py, where Py is Final Sales of Domestic Product (aggregate demand). Aggregate demand has been relatively stable since the mid-80s growing at 5% y-0-y. The lowest is has been during that time period is 2.7%. For the first three quarters of 2009 aggregate demand was negative! Y-o-y growth in aggregate demand has not been negative for at least 50 years. The Fed failed to increase the monetary base sufficiently to offset the increase in the demand for money to prevent a fall in aggregate demand.
And that is why the economy has been hemorrhaging jobs during this recession.
I don’t know, but I will hazard a guess that the state of the construction industry is a big factor. A sharp rise in construction employment most likely accompanied recovery from the ’81 recession as it has in many others. Overbuilding in residential and commercial construction prevents that from happening this time.
I know I am late here but …
are you nuttick futz?
I suppose the main difference between 1981 and 2009 is that Reagan signed one of the biggest tax increases in history in 1982 while Obama signed one of the biggest tax cuts in history in 2009.
Another reason could be that the 1981 recession started about the time that Reagan phased in tax cuts and the 2001 recession started around the time that Bush phased in tax cuts. In the 90’s Art Laffer said that phased in tax cuts were a bad idea.
FWIW, the 2001 recession was a far slower job recovery than 1981.
Honestly, I find it hard to trust your objectivity when you compare 1981 and 2009 and talk about a jobless recovery. Why ignore 2001? Why not even mention that the current mess started under Bush? The US had recovered from the sharp 80 recession before Reagan took office.
Are you sure that you aren’t a closet Obama hater who doesn’t let facts get in the way of your opinion?????
WOW
As mentioned by many, I too lack any data to have an opinion. I will mention an article I read before the recovery, (unfortunately I can’t remember where)talking about the UK. This said that employment after recessions does not get back to pre-recession levels until the economy had actually grown back to its previous level. The article was saying that we should expect unemployment to take quite some time (possibly years) to get back to pre-recession levels. There were therefore people who, based on previous recessions, would have expected a shape much more like 2007 than 1981.
Obama and Bush increased spending hugely, further fueling the fires of the Business Cycle. Also, there are now far more regulations restrictin gthe starting of businesses. Basically, if more money (and thus workers) is being spent in the businesses of war, banking and costructino, they can’t be in the places where they are needed (whatever that is).
If you imagine that it started raining gold in Alaska, lots of people would move there, and would spend tonnes of money with their new wealth, ‘boosting’ our economy. When it stops raining, then everyone will have to go back to their jobs. If Obama and Bush then decide to borrow tonnes of oil from Saudi Arabia and hire NASA to make it rain oil again, the problem will be exacerbated, not solved.
The solution is deregulation, smaller government, less borrowing and above all, solid currency (dollars are easier to copy than oil).
Just to give a somewhat more “meta” answer to the question asked. he difference between the “joblessness” in recovery is an obvious result of the velocity of job-loss. By the middle of 2008 jobs were falling at 500k+ a month. around 700k per month right at the end of bush’s term.
And while job-loss immediately began to slow following the Beginning of stimulus spending, it had been left unchecked for too long.