Understanding the Great Recession

Here is a bit from an article in the Economist magazine that tries to understand why this recession is worse than any other post-WWII recession:

IN THE summer of 1984, Ronald Reagan declared “morning in America”. Running for re-election after a tumultuous first term during which unemployment rose to a postwar record of 10.8%, the president needed a hopeful message to take to the American people. When Reagan’s television advertisement ran, nearly two years after the official end of recession, unemployment was still high, at about 7.5%. But the president could accurately claim: “Today more men and women will go to work than ever before in our country’s history.”

In the spring of 2010, a similar dawn is some way off. Economic recovery probably began ten months ago, but employment has scarcely risen from its trough (see chart 1). About as many Americans are working as in the autumn of 1999—in a population that is larger by 28m. If Barack Obama wants to repeat Reagan’s boast in his own re-election campaign, by which time the recovery will be three years old, the economy will need to add jobs at a rate of more than 3m a year. That has not happened in over a decade.

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What is less well understood is that the American jobs machine has stalled badly. Granted, employment has been rising—non-farm payrolls were up by 162,000 in March—and may gain strength in the months ahead as cyclical joblessness falls. But the recovery has not yet brought jobs for the millions of workers idled by recession. This is at odds with what economists refer to as Okun’s law, a rough but empirically regular connection between changes in GDP and changes in unemployment. Over the past 12 months unemployment has not fallen as quickly as economists have come to expect. The hitherto tight link between economic activity and job creation looks disturbingly slack.

Go read the article, it is well worth your time.

The US is very lucky that Obama won the presidency and not the right wing ideologue John McCain. Obama did help stop the collapse of the economy. The right wing sees the economy as a "morality play" so they are enthusiastic cheerleaders of Andrew Mellon's dictum during the Great Depression:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

These are very brave words coming from the mouth of a multi-millionaire who wouldn't have to worry where his next meal came from or how to put shelter over his head. The reality is that the Great Depression destroyed many lives and created a loss of production that was never regained. The US would have been far better off if those tens of millions of unemployed were put to work in the 1930s building more infrastructure (and building the weapons to quickly and decisively defeat the Axis powers). But they weren't. This was all lost so that right wing nuts could feel good about "cleansing" themselves of excess.

The right close their eyes to the very real devastation that a severe recession wreaks on the middle and lower classes. From the Economist article:

The long-term effects of all this are hard to predict, especially when the recession ended so recently. But history provides some guide to the unpleasant shifts that lie ahead for many Americans.

Lots of laid-off workers will never regain their former earning power. A study of those who lost stable jobs in 1981-82 found that their earnings fell at once by 30%; they had made up less than half the gap 15-20 years later. New graduates entering the labour force will earn less than they might have done a few years ago, although the effects will fade during their careers. A recent study by Yale’s Lisa Kahn estimates that each percentage-point increase in the national unemployment rate produces a loss in initial wages of 6-7%. New graduates take less prestigious jobs and stay in them longer, stunting upward mobility.

For those aged 16-24 the effects are even greater. Some have chosen to carry on studying, which should lead to increased productivity and pay. Enrolment rates at high schools and colleges have increased by several percentage points since the recession began. But many other young people have become idle, neither in work nor in school, and can expect low pay when they do find a job. ...

Older people have less time to make up for lost earnings. Some have put off retirement plans in order to rebuild lost wealth but half as many again, says a recent estimate, have retired early because job prospects are poor. These people face a longer retirement on reduced means, especially because early drawing of Social Security (ie, state pension) benefits means a lower payout. The shift will place extra strain on public finances, because older people will pay less in taxes and collect more in benefits. By reducing payroll-tax revenues, the recession has hastened the arrival of an annual deficit in Social Security, once forecast for 2016 but now expected this year.

Income inequality is likely to widen. Educated people were less likely to lose their jobs during the recession. For workers without a high-school diploma, the unemployment rate peaked at 15.6%; for those with one, it was more than four percentage points lower. A college degree knocked off another six points. The educated may be favoured by future job growth too. That would place upward pressure on wages that are already above average, while the incomes of less skilled workers stagnate. Richer households will also find it easier to adjust to structural obstacles in the labour market. They can more easily afford to send children to university, absorb property losses or move to another city.

The tragedy of Obama is that he is a half-measures kind of guy. He didn't fully engage the country to stop the recession. He didn't fully engage Congress to get strong health care reform. He didn't fully engage BP to get a quick resolution of the Gulf oil spill and an energetic hit-the-ground-running response to clean up the spill. History gave Obama the chance to be a towering figure, a great President, but his half measures have cut him down to being a good-to-middling president who will soon be forgotten among the Millard Fillmores and Calvin Coolidges of history.