Wednesday, August 31, 2011

The Recession That Never Ended

The United States has been out of recession since June 2009 according to the National Bureau of Economic Research (NBER).  Many Americans have not been helped by this recent economic growth as unemployment has remained above 9%, and long term unemployment has become a lingering and concerning problem.  Many pundits have been speculating that we may be double dipping back into recession, while others including Harvard's Kenneth Rogoff are contending that we never really exited the first one.

There is more than one way to skin a cat, and hundreds of different ways to mark growth or lack thereof.  The most common and official way to mark a recession is two continuous quarters of negative economic growth, with the recession ending as soon as positive growth is sustained.  Another way to measure a poor economy is the return to pre-recession employment levels.  We are still a long way from recovery by that standard.

This graph is from the website, Calculated Risk.  I think it paints a frightening picture of how far off from pre-recession levels that we still are at.  This employment contraction is enormously deep and enormously longer in duration.  If we do enter another sustained period of GDP negative growth, it will be historically merged with the recession that we just got out of in terms of return to peak employment.  Henry Farber wrote, "It is clear that the dynamics of unemployment in the Great Recession are fundamentally different from unemployment dynamics in earlier recessions."

One thing that I also take from this recession is that while modern monetary policies can be shown to have fewer recessions than previous monetary policies, their duration is getting longer.  The three longest contractions in employment are also the three most recent.  All of them pale in comparison to the unemployment problems of the 1930's.  It took them over a decade to return to the <5% rate that they had before 1929, and even then it was largely because of the armed services drafting individuals.  That can still be considered the outlier of all outliers in terms of post industrial revolution economic history.  There is one possible commonality.  If we do go into a second recession, our employment contraction will last over both of them, just as in the Great Depression and the recession of 1937 had two distinct recessions, but unemployment never returned.  The sad fact is that the 1930's unemployment had a better (if still unsatisfactory) bump in employment between 1933 and 1937 than we have had between 2009 and today (which perhaps says something about the New Deal versus the Stimulus).

This data points to a good research topic: why are modern contractions in employment lasting longer?  Is this simply a natural trade-off for monetary and/or fiscal policymakers?  Has the U.S. labor market become less flexible or resilient to or during contractions?  Is it a simple coincidence?

Christina Romer wrote a couple papers in the 1990's that dealt with recessions in terms of peak to trough.  She was dealing with a historical industrial index peak to trough.  One of them is "Changes in Business Cycles: Evidence and Explanations" (gated) which appeared in The Journal of Economic Perspectives in Spring 1999.  These studies show the effects that macroeconomic policies have had on contractions.  They have become less frequent, but longer in duration.  Recessions before macroeconomic policy making went into effect (1930's) were shorter with the only very long one (longer than 60 months peak to trough) happening in 1887.  This problem of prolonged employment contractions seems (particularly) to be getting worse.  Her studies can and should be updated to include this most recent and abnormal recession.  If macroeconomic policies are to be continued, we should attempt to alter them for these length problems, especially with regard to employment.

All of these numbers are incredibly depressing, but it is always important to remember that we've gotten out of every recession in the past and we will see sunnier days again!


  1. I think there are several factors that help explain the numbers in the article you reference:

    1) This is the first recession since the Great Depression that was caused by the collapse of a leveraged asset bubble. People in the 1920’s were buying stocks on margin (leveraging) that had drastically overstated values. When it collapsed, they were ruined financially. People were doing the same thing in the real estate market in the 2000’s.

    Other post-Depression recessions were caused by monetary or business or inflationary cycles. These causes for the other recessions were imbalances (bad pricing) in markets for goods and services, which is a short-term immediate transaction market. This means the bad pricing effects most affected current expenditures (consumption) and production and so the markets corrected fairly quickly.

    Asset bubbles are different. It is a market for long-term financial flows. It is a market for productive CAPACITY, which is something with a much longer term implication. Mortgages in the 2000’s were particularly long-term commitments of cash flow that required very small initial investments (down payments), sometimes none at all. Because of this, people got very leveraged.

    People did not usually immediately spend all of the money reflected in their higher real estate prices, so the full effects of the trillions of dollars in increased real estate value did not make its way into GDP, production of goods and services, etc. The flip side of this is that the drop in asset prices did not hit us all at once in a drop of multiple trillions of dollars in GDP. But, because of the long-term nature of the commitment of financial streams for mortgages, it will take longer to work its way out of the system.

    2) The specific nature of the asset bubble also has affected the way the job market has reacted, both on the upside, during 2002-2007, and during the current painfully slow recovery. But if you look at it, this should not be too surprising. What was growing in revenue in the economy during 2002-07?
    - Defense and homeland security spending, which does not increase the living standards of citizens (except defense contractors) or help improve our domestic infrastructure or productive capacity.
    - Speculation in the housing market, which is an especially non-productive investment choice. What does an increase in real estate prices cause? Increased cost of doing business and increased housing costs, not increased productive capacity or innovation. The only businesses that benefit from an increase in housing prices are real estate companies, mortgage bankers and a few related businesses. But these are all transaction-based businesses. They do not produce anything. Home builders benefited, too, but not because they produced better homes or were more efficient. It was essentially a rent-seeking benefit, not productivity-related.
    - Finally, the bursting of the housing bubble had a particularly harmful effect on the current recovery, in addition to the ones I mentioned above. Historically, loans based on home equity were a significant source of funding for new companies, which were responsible for much of the job creation and increased productivity during prior recoveries. Also historically, a significant down-payment was required for most home loans. This meant that even if housing prices did not increase or even decreased a bit, home owners would still have significant equity in their home. They could use this as the basis for loans to start new businesses or keep an existing small business from going under in hard financial times. Not only has the real estate market dropped 30+% nationally, but widespread reduced requirements for down payments resulted in many home owners actually having negative equity in their homes. Thus the source of finance for much of the job and productivity growth we would normally be experiencing has dried up and will not return for at least several more years.

  2. The problem is the Big's: Big NY Banks/Ins./Wall Street, Big Oil, Big Coal, Big Corp's, Big Government Regulators/Agencies/Lawyers, Big Government Unions, Big Government Teacher Unions and decades of Lawyer and Litigation that is a Job Killer and they move slowly and "contractions" last longer because the Big's resist change for their own benefit.
    Small businesses must move quickly or die by the Big's.
    Small is Beautiful.

  3. Justin Pugsley via LinkedIn

    I think the bubbles created by the Fed are getting bigger and that's because policy makers seem prepared to do just about anything to avoid any kind of recession. Mild recessions can actually be quite helpful in rebalancing an economy before it gets seriously out of kilter, which is where we are now.

    The recent bust, brought on by the bursting of a finance bubble, has been potentially lethal and the massive monetary stimulus that has followed has now created a bond bubble. When that bursts it will have potentially severe consequences for debt addicted governments and the wider economy that prices commercial loans of these bonds.

    I am quite fearful that after putting off the day of reckoning off for so long we might be heading for some kind of economic disaster either a severe depression or very bad inflation / stagflation, which could lead to a whole rethink of fiat money and the role of central banks.

    If that happens - and I hope it doesn't - there could be moves to link back to gold for example, which would be a shame, because the principle of fiat money is great and very flexible, if it is not abused, but in the US and in many other places the temptation for abuse has just been too much.

  4. Cliff Carothers via LinkedIn

    One thing that can be seen by the graphs is that this is not a recession. Similarly to 1929 and 1871, what has a occurred is a money supply contraction exacerbated by the great flaw of capitalism, that of excessive debt created credit built on the backs of long lived assets such as housing to feed a speculative frenzy.

    1871 resulted in a twenty year lag of European employment because of their massive housing supported transfer of wealth to America. As the author stated, the stimulus of a massive world war that killed 55 million people was enough to draw America out of what could have been a twenty year employment lag in just ten years.

    Now we are facing another twenty year employment lag because of repeating what the Europeans did to themselves in the 1870's. We are trapped in a collapsed debt fed credit system that can only be corrected by isolating the current debt and finding an alternative to our current private banking debt supported credit for future commerce.

    In the 1930s, the structure was unwound and hundreds of speculatively wound banks were absorbed by the remaining banks under more conservative principles. The international plutocracy that has emerged has yet been able to place a stranglehold on what the world knows must occur.

  5. Joseph Ward via LinkedIn said:

    The music at the end of the post is just for fun. I've noticed that a lot of econ. bloggers like Krugman and Tyler Cowen review music in their blogs as well. I didn't want to review music, but I like to throw a recommendation at the end of my posts.

    Clif, it almost seems like you're hinting that we're in the trough of another Kondratief wave.

  6. Clif Carothers via LinkedIn:

    Yes, I believe so. For whatever reason causes the wave, perhaps successive business cycles that increasingly concentrate wealth, perhaps successive technological improvement, perhaps the repeating pattern of multigenerational psychological changes, we are in the deep trough once again.

    This time, the merging of America’s overwhelming military might subduing trade barriers, China’s reemergence, the post WWII baby boomer imminent retirement, the rising costs of maintaining political power in what has become our financial democracy, and a political retreat from the great society created a massive opportunity for international banking to extract the West’s wealth and feed it through multinational corporations to the East, creating the final spike of the wave from which we have now precipitously fallen.

  7. Ronald Cooke via LinkedIn:

    We are in a period of chronic recession. There will be signs of recovery, upticks in GDP, and lower unemployment. All temporary. The long term GDP trend is down. Prior recoveries were quicker because there were fewer regulations, innovation was encouraged, new markets were created, and capital was available. It was assumed that creating a new business was a good idea. In today's America, our federal, state and local governments believe it is their duty to block business opportunity.