Anatomy of the Global Economy
The Anatomy of Slow Recovery
J. Bradford DeLong
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BERKELEY – Between 1950 and 1990 – the days of old-fashioned inflation-fighting downturns engineered by the United States Federal Reserve – America’s post-recession unemployment rate would fall on average 32.4% over the course of a year from its initial value toward its natural rate. If the US unemployment rate had started to follow such a path after peaking in the second half of 2009, it would now stand at 8.3%, rather than 8.9%.
Unfortunately, none of the net reduction in the US unemployment rate over the past year came from increases in the employment-to-population ratio; all of it came from declining labor-force participation. Unemployment has fallen from 10.1% over the course of the past 18 months, but the employment-to-population ratio has remained stuck at 58.4%. Perhaps it would be better if unemployed people who could have jobs – and who at full employment would have them – were actively looking for work rather than out of the labor force completely.
If you take that view, between 1950 and 1990, the US employment-to-population ratio would rise an extra 0.227% annually on average for each year that the unemployment rate was above its natural rate. If the US employment-to-population ratio had started to follow such a path after its 2009 peak, the current ratio would be 59.7%, rather than 58.4%. (In that case, we would be experiencing “morning in America,” rather than the current state of economic malaise.)
This is, I think, the best metric to use to quantify the decidedly sub-par pace of today’s jobless recovery in the US. It is not out of line with other American yardsticks: since the output trough, real GDP has grown at an average rate of 2.86%/year, barely above the rate of growth of the US economy’s productive potential. And it is not out of line with the experience of other rich economies, whether Japan or in Europe.
Indeed, today’s US predicament contrasts sharply only with the current experiences of developing Asia. There, real GDP growth and declining unemployment show a solid, well-entrenched, and rapid recovery – to the point that inflation will soon become a more significant macroeconomic problem than job creation.
The obvious hypothesis to explain why the current US recovery – like the previous two – has proceeded at a sub-par pace is that the speed of any recovery is linked to what caused the downturn. A pre-1990 recession was triggered by a Fed decision to switch policy from business-as-usual to inflation-fighting. The Fed would then cause a liquidity squeeze and so distort asset prices as to make much construction, sizable amounts of other investment, and some consumption goods unaffordable (and thus unprofitable to produce). The resulting excess supply of goods, services, and labor would cause inflation to fall.
As soon as the Fed had achieved its inflation-fighting goal, however, it would end the liquidity squeeze. Asset prices and incomes would return to normal. And all the lines of business that had been profitable before the downturn would become profitable once again. From an entrepreneurial standpoint, therefore, recovery was a straightforward matter: simply pick up where you left off and do what you used to do.
After the most recent US downturn, however (and to a lesser extent after its two predecessors), things have been different. The downturn was not caused by a liquidity squeeze, so the Fed cannot wave its wand and return asset prices to their pre-recession configuration. And that means that the entrepreneurial problems of are much more complex, for recovery is not a matter of reviving what used to be profitable to produce, but rather of figuring out what will be profitable to produce in the future.
As the economist Dan Kuehn likes to say, a recession is like somebody knocking your jigsaw puzzle, disturbing the pieces, and turning some of them over. When the Fed ends a liquidity squeeze, it turns the pieces right side up. So it is easy to reassemble the puzzle. Now, however, there is no one to turn the pieces right side up, so things are much harder to correct.
Indeed, I believe that things are even worse: as long as aggregate demand remains low, we cannot even tell which pieces are right side up. New investments, lines of business, and worker-firm matches that would be highly productive and profitable at normal levels of capacity utilization and unemployment are unprofitable now.
So, what America needs now is not just a recovery in demand, but also structural adjustment. Unfortunately, the market cannot produce a demand recovery rapidly by itself. And it cannot produce structural adjustment at all until a demand recovery is well under way.
J. Bradford DeLong, a former US Assistant Secretary of the Treasury, is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau for Economic Research.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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JGBHimself 05:07 04 Apr 11
First, very well done. As good as, or better than, any other explanation we have read.
However, since you are that good about that, why don't you explain to U.S. why all economic theories did not explain or predict what did happen, did not appear to work when they were used to counter what happened, and why no reigning member of any of youse's guy's "schools or economics" can or will explain not only that, but what we can and should do now.
For example, why, when we/W loaned all that money to the Big Bad Bailed-Out Banks (aka, BBBB's), we/W, unlike China, did not require them to loan out that money, instead of covering up and over their losses, and paying themselves huge salaries for a job well done? Are Chinese Communist economist more better intelligent even than our assumed to be superior All American economists?
"On the other hand" (economist english), did that prove that Monatary Theory simply did and does not work; or that it did work - badly; or that it was, not unlike HAMP, never intended to work?
lukehlee 09:29 12 Apr 11
We cannot solve our current economic problems with the same economic thinking that has created more problems rather than solved. Why? Please see this article: “Overcoming an Economic Sisyphean Task – Or, the True Path Back to Economic Prosperity” http://goo.gl/b/rgcU
This time I believe we need a different kind of idea (i.e., thinking out of the box) and solution for the current economic crisis. That is, we need an Alexandrian Solution. The true “Alexandrian Solution” is, for example, what Albert Einstein was looking for in his search for a Grand Unified Theory — a formula that was simple enough (!) to explain all of physics. I believe there is also a solution that is simple enough (!) to effectively solve major problems (e.g.: unemployment and lack of consumption) of the current economic crisis. Also suggest seeing: "A New System for the Real Market as a Solution for..." http://t.co/MRirNf3
jazzywine 03:56 14 Apr 11
As an sucessful entreprenuer, I can emphatically state I am unwilling to invest, create or hire with the current crew in the white house. The risk reward ratio has been thrown on its head by the redistributionists. They want to turn us into Europe, but without the charm. The creative class is sitting it out!
uchrisn 08:33 01 May 11
You have highlighted an imprtant issue here. That law makers and other leaders in this society of ours are sitting back comfortably and expecting the workers to work harder. They are placing very tough burdens on the average citizen and are not placing any burdens on themselves.
They may try to sound just to themselves on the outside, however as you rigthly point out, when you look at the inside, the figures show a different story.
jazzywine 03:07 25 Aug 11
the obama 'economy' is simply, Tax, Take, Intimidate and Regulate. no secret why no growth
alexferro 01:29 01 Apr 11
Molasses run much faster than the current employment trickles up ...
Its bleak but perhaps as soon as one labels it bleak it will bleak a
record recovery of employmant will be on its way
Alejandro Ferro
Miami