Jobless Recovery: Fasten Your Seatbelts 37 comments
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As of this writing, it looks as though the average unemployment rate in 2009 is going to average at least 1.5 percentage points above where last December the incoming Obama administration thought that it was likely to be. Instead of the 7.8% forecast last December, year-2009 unemployment looks to average 9.3% or higher. Year-2009 real GDP also looks to be lower than the income Obama administration was forecasting last December: $11.40 rather than $11.53 trillion. The macroeconomic news has been bad. The financial crisis that gathered force from the summer of 2007 through the summer of 2008 and then exploded after the collapse of Lehman brothers did more damage to the economy than the consensus of forecasters had imagined.
Back in the 1960s one of President Johnson's economic advisers, Brookings Institution economist Arthur Okun, set out a rule of thumb others quickly named "Okun's Law": if production and incomes--GDP--rises or falls 2% because of the business cycle, the unemployment rate will fall or rise by 1% along with it: the magnitude of swings in the unemployment rate will be half or a little less than half the magnitude of swings in GDP. Why? For four reasons: (a) businesses will tend to "hoard labor" in recessions, keeping useful workers around and on the payroll even if there is temporarily nothing for them to do; (b) businesses will cut back hours when unemployment rises, and so output will fall more than proportionately because total hours worked will fall by more than total bodies employed; (c) plant and equipment will run less efficiently when hours are artificially shortened because of the recession; and (d) some workers who lose their jobs won't show up in the unemployment statistics but will instead retire or drop out of the labor force. For all four of these reasons, whatever rise in the unemployment rate we see in a recession is supposed to be a fraction of the fall we see in GDP relative to trend.
But this time we are not following this rule. This time Okun's Law is being broken. The unexpected 1.2% extra decline in real GDP in 2009 should have been accompanied by a 0.5 or 0.6 percentage-point rise in the unemployment rate, not by the 1.5 percentage point rise in the unemployment rate we are now seeing. I confess that the fact that this is happening comes as a surprise to me. But when I think back we have seen this before. In 1993--two full years after the National Bureau of Economic Research had called the end of the 1990-1991 recession--the unemployment rate was still higher and the employment-to-population ratio lower than it had been at the recession trough. And we saw the same "jobless recovery" after the recession of 2001: it took 55 months after the formal end of the recession in November 2001 before a greater share of Americans had jobs than had had them in November of 2001.
It is likely to be a recovery. The central tendency forecast right now is that real GDP contracted at a rate of 1% per year or less between the first and second quarters of 2009, and will grow between the second and third quarters at a rate of 2% per year or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of the recession for June 2009, second most likely to call its end in April, and a recession-end date later than June 2009 is a less likely possibility. One reason that we are likely to see a recovery starting... right now... is the stimulus package. It probably boosted the real GDP annual growth rate relative to what otherwise would have been the case by about 1.0 percentage point in the second quarter, and is going to boost the annual GDP growth by about 2.0 percentage points between now and the summer of 2010--after which its effects tail off.
But it will not feel much like a recovery. After the 1982 recession the turnaround in employment lagged the turnaround in GDP by only six months. Thereafter employment growth was very strong: in the eighteen months up until the end of 1984, growth in work hours averaged 4.8% per year. It took only 7 months after the 1982 recession trough for the employment-to-population ratio to rise above its trough level (1980: 2 months. 1975: 5 months. 1970: 18 months. 1961: 13 months. 1958: 4 months. 1954: 8 months.) By contrast, it took 29 months after the 1991 recession trough for the employment-to-population ratio to exceed its trough level, and 55 months after the 2001 recession trough for the employment-to-population ratio to do so. Productivity growth in the immediate aftermath of the end of the 1991 and 2001 recessions was surprisingly rapid: rapid enough to eat up all of real demand growth and more as businesses decided to take advantage of the economic downturn to slim down their labor forces and become more efficient.
Today--unless we get much faster real GDP growth than currently looks to be in the cards--we are headed for a jobless recovery. The answer to the economic question--was the stimulus sufficient to rapidly return the economy to something like normal unemployment?--is likely to be: "h--- no, it was much too small..."
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This article has 37 comments:
Something to note is that I've noticed that both of your jobless recoveries just happened to coincide with the latest two recessions we've had. These recessions just happened to coincide with a massive push towards globalization, in particular participation of emerging economies.
To add two and two together, given that we are now in a globalized society, could a leading indicator be a recovery in these developing countries? Could their job numbers be substituted for what used to be job numbers in America? Given that these nations are poised for growth now, could that be a sign that the recovery is in the works?
www.globalresearch.ca/...
Speaking of the stimulus and not the deficit, one cannot have perpetual growth or even quality growth based upon "viagra and candy" (Buffett's description of the stimulus package). No doubt fun for the moment (and a false stimulant of perceived real performance) but a let down afterwards when one sees the impotence in the "government" economy.
1. Manufacturing
We have shipped all our jobs and the companies that provide them to foreign soil, along with their profits (our tax revenue). This has changed significantly since the last recessions.
2. The Consumer
The consumer still had net worth after these last recessions, the boomers were much younger, now they are retiring, saving money. Debt load has increased toxically since.
There can be no recovery without these two criical ingredients. This recession is completly different than any other including the GD. The US had wealth and manufacturing to combat the GD now we print debt to buy debt. Totally different circumsatances and this requires a complete different strategy, which unfortunatly we are not getting.
I would only say first that you should consider being more careful in choosing your title metaphors. Just as a suggestion, I expect "have you chosen your chair on the deck of the Titanic?" may be more apt than 'fasten your seatbelts'. And second, I simply don't agree with the Keynsian notion that ANY amount of government stimulus is a solution. There is NO amount that would have worked IMHO, and I think in fact, "Government Stimulus" is perhaps THE classic oxymoron.
Some good points added by comments, as well. Is there really a positive correlation between the advent of jobless recoveries and the globalization of the world economies? That ties in very well to the comment by conceptwizard as to the loss of jobs to developing nations. And, finally, Matrixsurfer expects an echo recession after a short recovery.
I have to admit, that I agree with the author and all three comments summarized. Why? Well, not just because I see no real job creation coming, even though I don't, but because I also don't see any real tangible increases in demand coming from either the consumer, businesses, or trading partners. Without rising demand, where do we generate rising GDP? It's certainly not going to come from housing or manufacturing. The commercial real estate industry is looking less healthy every day. Europe may be in worse shape than we are, as is Japan, so a dramatic rise in imports doesn't seem likely. Will businesses expand with so much excess capacity? I can't imagine why. The largest and most affluent generation in America has seen its investments in equities and housing drop like lead. Will they lead us back with a consumption spree? As a nation, we are in debt up to our armpits and our savings have been depleted by market forces. We just can't consume like we did prior to this mess.
Technology, healthcare, and financials may show some growth over 2008 because 2008 was such a terrible year, especially for financials. And can we really trust the reported income of the banks? We know why healthcare will rise: because it almost always does. Costs go up and they just raise prices and we just keep paying. But technology, why will it do better than the rest of the market? Because that is where innovation lives. That is from whence things that are worth having come. Businesses have put off upgrades and will start spending on potential efficiency boosters at the hint of a recovery. That is where we are: the "hint" of a recovery.
The question is: Will this recovery last? I just don't see where the demand will come from so I have answer: No.
One has to ask, is this worth it?
as an economy shifts from a manufacturing to service society, there are other dynamics which set in causing employment recovery to lag. once a job is lost in the service sector, it does not come back right away to support a recovery.
Just more evidence that GDP figures are at best Bunk and at worst Lies.
The IMF wrote an excellent and in depth piece on recessions over the last 50 years citing reasons and solutions. I summarised it here on SA some weeks ago but its still relevant:
seekingalpha.com/artic...
1. Perhaps as has been stated by others, GDP has actually contracted more than the estimates show.
2. By the same token, perhaps GDP was even lower that what the books show (maybe even flat to barely negative) during a few quarters of the so-called recovery back in 2002-2003. A recent study suggests that productivity during the oughts has been lower than thought, which adds further credence to this school of thought.
3. Just what kind of "recovery" is it, *really*, if employment is still contracting, anyway? .. At best, 2002-2003 wasn't a "jobless recovery" - it was a "jobLOSS recovery" ... and I just don't think we can honestly square that with Econ 101 very well, whatever the productivity rate may be.
Whatever the cause of the so-called recovery of 2002-2003 being so very recession-like, it might also just be more appropriate for us to identify recessions not by what GDP is doing, but more-so by what *per capita* GDP is doing.
On one hand you have the past actions in recessions, on the other hand I think you are starting to see a realization from US business that they are ruining their home market. Jeff Immelt of GE has made some comments on this. In addition, I don't hear the banks, consultants and columnists beating the drums on how wonderful off-shoring and outsourcing is for the economy. Also, this is the first recession in a while with the Democrats in power, which would mean more focus on jobs (90-91 Bush I, 2001-2002 Bush II).
If this follows the trend of the last two jobless recessions, I think there is going to be a strong backlash against globalization in the US.
OK, I will emphasize: if we could create wealth by having folks dig and fill holes, we would. Alas, such economic alchemy only exists in the dishonest words of the political class.
"One study noted that the U.S. expenditure multiplier is close to 0. Thus the authors concluded that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth. A second study done by at the University of California Berkeley concluded that the tax multiplier is 3, meaning that every $1 rise in taxes will reduce private spending by $3. "
We started a small business because we both got layed off. I guess we are among the ranks of the "Involuntary Small Business Owners". I don't offer health care benefits because I can't afford it, plain and simple. 80% of our costs are payroll, if this employer mandatory health care gets pushed thru my only choice is to lay people off to pay for it. I simply can't increase my fees to my customers, they are Senior Citizens on fixed incomes. We have increased our P/T employees (not independent contractors) from nothing to 40 over the past 2 years and we thought we were doing pretty good.
We supported the public option so our folks would have choices to get some pretty good insurance. Unless, I completely had my head in the sand, I don't remember Obama or anyone else for that matter indicating that small business would have to pay for it. It was to come from the wealthy (which I promise you we are not, after 2 years we just got to breakeven) and efficiencies in the health care system.
The health care employer mandate doesn't make any sense. Right now we need employment and innovation. New small business is where we need it. This is going to be a drag on the economy. For example, in our case, we just got to the point where we could add a marketing person to help us get to the next level. We are going to have to rethink that and split our time from operations to eliminate the position. This is just my example, how many other small business owners are going thru the same mental gymnastics right now I don't know.
You know we all have choices from where we buy goods from but we all lack the discipline to buy American. I once watched a program where a family of four tried to exist for one month not buying something from China. She could not avoid some things as their products exist in our the food we eat as well.
On Jul 18 08:24 AM Tom E. wrote:
> In the last two recessions, business used the cover of recession
> to ship US jobs overseas. Is this happening again? It is hard to
> tell.
>
> On one hand you have the past actions in recessions, on the other
> hand I think you are starting to see a realization from US business
> that they are ruining their home market. Jeff Immelt of GE has made
> some comments on this. In addition, I don't hear the banks, consultants
> and columnists beating the drums on how wonderful off-shoring and
> outsourcing is for the economy. Also, this is the first recession
> in a while with the Democrats in power, which would mean more focus
> on jobs (90-91 Bush I, 2001-2002 Bush II).
>
> If this follows the trend of the last two jobless recessions, I think
> there is going to be a strong backlash against globalization in the
> US.
One thing that could help a lot is lower energy prices. I like Polywell Fusion. But we won't know if that will work for two years.
.
On Jul 17 05:40 PM conceptwizard wrote:
> You are missing two ingredients to this scenario.
>
> 1. Manufacturing
> We have shipped all our jobs and the companies that provide them
> to foreign soil, along with their profits (our tax revenue). This
> has changed significantly since the last recessions.
>
> 2. The Consumer
>
> The consumer still had net worth after these last recessions, the
> boomers were much younger, now they are retiring, saving money. Debt
> load has increased toxically since.
>
> There can be no recovery without these two criical ingredients. This
> recession is completly different than any other including the GD.
> The US had wealth and manufacturing to combat the GD now we print
> debt to buy debt. Totally different circumsatances and this requires
> a complete different strategy, which unfortunatly we are not getting.
> You are missing two ingredients to this scenario.
>
> 1. Manufacturing
> We have shipped all our jobs and the companies that provide them
> to foreign soil, along with their profits (our tax revenue). This
> has changed significantly since the last recessions.
CW hit the nail right on the head, and suggests the nature of the breaking of Okun's rule-that when he suggested the phenomena to LBJ we had an economy that was manufacturing based. In a service based economy, where "production," frequently refers to tasks so menial as stacking goods on discount retailer's shelves, any reduction in sales will have a much greater effect on employment.
Ironically, the PC and then the servers that pushed them over the Internet, is what ended up making 90's and 02 jobless recovery even worse as businesses depended on "increased productivity" from the IT workers as the CFO's shipped all the day labor overseas to pay for the few additions to the IT department. Globalization is a slang word for the tech revolution.
Mega-mergers, buyouts and companies too big to fail do nothing but crush jobs. I think it is time to re-think how big companies are allowed to become. Wal Mart crushes jobs and kills labor. What the he-- is GE anyway, a bank or a washing machine or Dateline? How many jobs were absorbed or overlapped during these mergers? ATT, its back a behemoth again. Drug companies that were in our day to day language a decade ago have been renamed 3 times over. Granted tax considerations would have to be given to the big boys to spin off and out but if you want jobs, we have to either create another bubble or reslice the pie as the wealth concentrates.
Five years ago no one knew who Goldman Sachs was unless you worked on Wall Street. Now they are Rolling Stones material. The public outcry has just begun. The Minyans have been referring to this as public acrimony. The fuel that burns Rome comes from more than just an insane fiddler one might think.
1. Interest rates 2. The current state of default/bankruptcy that exists for the US Government and 3. Waste
1. The level of interest rates.
Does the default rate only ever correlate to the interest rate, i.e. it is causal, and hence why monetarists believe that monetary policy works? And/or are different interest rates and the supply of money a condition based on the expected real economic growth rate and opportunity costs of holding money instead of investing it, for different qualities of borrower? If all that needed to be done to rescue the economy was to increase debt and reduce interest rates then the implied causal link is that the size of the economy and the levels of default/hardship faced by its citizens are solely determined by politicians and central banks. How absurd is it that central banks tour the country with the message that quantitative easing is being employed because without it, everyone would suffer?
2. The "right" level of output.
It can be argued that in the last twenty years we have seen two revolutions. One was the Telecom/Media/Technology of the internet bubble and the other the financial derivative bubble (to include swaps and securitizations). There are three measures of GDP output; Income, Expenditure and Production. These are presumably both negative for Income and Production and massively positive for Expenditure, if you include Govt/Fed/State deficit increases as part of expenditure. I agree that an economy that has emerged from a bubble has to return to the state that existed prior to the bubble, except for "normal" growth in unaffected areas. Since the economy did not contract following the bursting of the TMT/.com/Internet bubble, one could assume that the level of the economy operating between 1990 and 1998 is as good a proxy as any for the economic bottom. That leaves around a decade of growth based on the financial derivative bubble. The effect of leverage doesn't matter in this sense, since all we need to do is return to 1998 GDP dollars to find the base that represents the removal of the cancerous growth since then. So, does this mean that where economic growth of around 3% per annum for ten years (and growing) represents an output gap that must be filled? Does this mean that a central bank should provide triage to an economy to recover this output gap by printing money? Depends if you are a communist/socialist or a free marketer I think.
3. Sovereign Default, National Debt, Wasted money and On-going Waste.
The National Debt has a ceiling set by congress that bares little or no relation to the change in size of the debt. The political machinery approves the debt accumulation ex-post, in the full knowledge that ex-ante estimates are different and much larger. The US Government will be in full default on its obligations, not when determined by politicians or central banks, but when the interest repayments on this debt exceed possible taxes. Official debt is probably around $12 trillion plus net liabilities of Agencies (such as the Fed, Freddie and Fannie) of a further $10-12 trillion. Total $24 trillion. The Government takes around $1 trillion per annum in taxes, so a key assumption of a nominal 5% interest rate, for an economy returned to normal, points to current default AT THE CURRENT TIME. ($24trillion x 5% = $1.2 trillion per annum). Taxes can be raised of course, but we know that this can reduce the overall tax take in depressed times such as these. Note also that this reflects the fact that the Administration has a rapidly diminishing to zero discretion in taxes collected.
Given than half of all tax dollars goes on the Pentagon and that this is spent on "colonial activities" abroad, this expenditure is an immediate drain on the economy. So this Administration knows that it will take half of tax payers money and give it away to foreign economies or blow it up. This is waste and is simply not discussed anywhere. The size of the issue facing the derivatives sector is magnified by this waste.
Free Samples
Professor Lelong:
Your conclusion about the stimulus plan being too small stems from a Neo Keynesian Theory not the common tread conclusions of the many and varied empirical economic studies of the Great Depression.
The common thread conclusions of the empirical economics studies of the Great Depression regarding Unemployment (that Summers, Romer, Bernstein and Goolsbee conveniently omit) are:
(1) Private Capital Formation leads to Private Sector Jobs,
(2) rising business and consumer taxes, at the Federal and State Level during the Great Depression, depressed Private Capital formation hence depressing Private Sector job creation,
(3) rising regulation during the depression reduced profits at the margin lending downward pressure on Private Sector Job creation.
Years after the Great Depression a Neo Keynesian Theory popped up trying to explain why unemployment was high and persistent during the Great Depression even after the deployment of massive Keynesian Deficit Government Spending.
The theory partially derives itself from the major deficit spending that occurred in World War Two. That the spending of World War Two lifted the Economy out of depression hence the Keynesian Spending during the Great Depression failed merely as the spending was too small. Problem is, the Theory can’t be proven and is full of the same massive holes that all Neo Keynesian Theory has come to enjoy.
Your question of “was the stimulus sufficient” leading to your assertion that “it was much too small” is your attempt to lend credence to the above Neo Keynesian Theory.
Its not that the Stimulus Plan was not of sufficient size ($800 Billion is a mighty number), it’s the design of the Stimulus Plan. You know Professor, quality vs. quantity. You know professor, development vs. growth.
Professor, if you design a Stimulus Plan based on Political-Political rather than Political-Economy, dismal results will follow.
Hence the Stimulus Plan now holds the Historical Economic Record for poorest stimulus design in class. Better yet, Summers, Romer, Bernstein, and Goolsbee conveniently forgot to read Keynes Theory. Keynes said Government Deficit Spending is temporary until the Private Sector recovers.
Professor,…Until the Private Sector recovers…., remember that part of what Keynes stated .
Private Capital Formation is under assault. Cap and Trade (energy tax), Socialized Medicine (tax), additional Regulation (cost) not to mention the specter of Federal and State tax increases (much more tax). There is absolutely no incentive for Private Capital Formation leading to Private Sector job creation.
Its not that the Stimulus Plan was too small, nor that we need an additional Stimulus Plan, merely recall the first plan and redesign the plan and maybe even try reading and debating the plan this time around. Designing a Stimulus Plan based on Political-Political rather than Political-Economy, with no provisions for Private Sector recovery, is ridiculous.
There is one silver lining of the Stimulus Plan. It brought us the non-statistic statistic Political Speak of “Jobs Saved”. The ultimate CYA Political Speak of a poorly designed Stimulus Plan.
But they will keep priming the pump with costly fixes and the pump won't respond. Because the pump is broken. And it's been broken for a long time.
Like you said, this generation hasn't experienced anything like the prolonged downturn that is coming.
On Jul 18 11:53 AM WAKEUP wrote:
> Another interesting article, woven from the threads of past lessons
> (ALL, WRONG, for this situation.) Interesting, because the article
> attempts to force the current situation to somehow end in a sensible
> way. Not gonna happen. EVERYTHING'S wrong with the economy, this
> time. NOBODY in business or government has ever lived through this,
> before, 'cause it has never HAPPENED, before. The stark truth is,
> there will be NO RECOVERY WORTH THE NAME. Jobs will NOT make a serious
> comeback; production WILL LAG, for who knows how long; unpaid personal
> debt will rocket out of the known universe; personal and national
> standards of living WILL FALL, and REMAIN LOWER than we are used
> to. Think this is just some determined pessimism? Then look long
> and carefully at any three main indicators, and see which you think
> points, realistically, to a "recovery," in anything like a reasonably
> short period of time.
It think a VAT tax would be a better way to pay for it than income tax surcharges. They are going too much after the wealthy. The expiration of the Bush tax cuts should be enough.
I hope they will reconsider. We need to reduce the cost of hiring people, not increase it.
On Jul 18 09:01 AM Pat C wrote:
> We supported the public option so our folks would have choices to
> get some pretty good insurance. Unless, I completely had my head
> in the sand, I don't remember Obama or anyone else for that matter
> indicating that small business would have to pay for it. It was to
> come from the wealthy (which I promise you we are not, after 2 years
> we just got to breakeven) and efficiencies in the health care system.
>
> The health care employer mandate doesn't make any sense. Right now
> we need employment and innovation. New small business is where we
> need it. This is going to be a drag on the economy. For example,
> in our case, we just got to the point where we could add a marketing
> person to help us get to the next level. We are going to have to
> rethink that and split our time from operations to eliminate the
> position. This is just my example, how many other small business
> owners are going thru the same mental gymnastics right now I don't
> know.
Our local governments and healthcare facilities need a strong talking to. If that means jailing government and healthcare bureucrats for not containing costs then that should be done. I think eventually someone like Chairman Mao will come along and send these people to labor camps. They definitely need to be "re-educated". Imagine that... "Capitalist China" and "Maoist America". So ironic.
On Jul 18 09:00 AM John Bowman wrote:
> A couple of interesting studies were highlighted this week by John
> Mauldin’s Outside the Box e-newsletter concerning the outlook for
> deflation versus inflation.
>
> "One study noted that the U.S. expenditure multiplier is close to
> 0. Thus the authors concluded that each $1 increase in government
> spending reduces private spending by about $1, with no net benefit
> to GDP. All that is left is a higher level of government debt creating
> slower economic growth. A second study done by at the University
> of California Berkeley concluded that the tax multiplier is 3, meaning
> that every $1 rise in taxes will reduce private spending by $3. "
I do agree that American big business screwed themselves just to pick up some short term profit by all of their outsourcing of our better, higher paying jobs. If our people can't earn a decent income, they certainly stop buying the products produced by the companies that transferred their jobs to India, China or wherever. End result is lower profits long term than they had before they did the outsourcing of all those jobs and a weaker America.
On Jul 18 08:24 AM Tom E. wrote:
> In the last two recessions, business used the cover of recession
> to ship US jobs overseas. Is this happening again? It is hard to
> tell.
>
> On one hand you have the past actions in recessions, on the other
> hand I think you are starting to see a realization from US business
> that they are ruining their home market. Jeff Immelt of GE has made
> some comments on this. In addition, I don't hear the banks, consultants
> and columnists beating the drums on how wonderful off-shoring and
> outsourcing is for the economy. Also, this is the first recession
> in a while with the Democrats in power, which would mean more focus
> on jobs (90-91 Bush I, 2001-2002 Bush II).
>
> If this follows the trend of the last two jobless recessions, I think
> there is going to be a strong backlash against globalization in the
> US.
On Jul 18 12:47 PM Birdfan wrote:
> Recoveries usually are jobless. Employers don't begin hiring or expanding
> hours for current employees until they have seen the bottom line
> increase and are certain that the recovery is real. By the time unemployment
> rates begin to go lower, the recovery has been well under way for
> some time. Will employment recover eventually? Of course, it always
> does.
>
> Free Samples
So, I ask empirically, what 'potential demand' is there going forward to propel our economy out of recession? Karl Denninger suggests that when you strip out the 'pulled-forward' component of GDP, we've had no real GDP growth for 7 years and now it will contract the excess out.
Hurricane season anyone?