What Took You So Long?

June 7th, 2014 at 10:27 am

As predicted, there’s a fair bit of kvelling over the fact that payrolls last month finally recovered the almost nine million jobs lost in the GR (great recession).  The figure below, by my CBPP colleague Chad Stone, shows the comeback, but more important from the perspective of this post, the pronounced difference in length it took to get the jobs back (see EPI’s Heidi Shierholz as to why just getting back to zero ain’t the goal).

Why so long?  I’ll tick off all the reasons I can think of, in rough hierarchical order (again, as I see them—I don’t have any metrics here), and I suggest readers add any I’ve left out to comments.

–When you’re down so far, it takes longer to come up:  The picture clearly shows the role of the depth of the hole in the job market in the GR relative to milder downturns.  In fact, eyeballing slopes, you can see that the rate of job growth in this recovery is about the same as the last one.  When you’re filling holes at the same rate, it will take longer to fill a deeper hole.

–Policy mistakes:  See Krugman, but the aggressive turn to austerity (budget cuts in the face of weak demand), the failure to recognize unique inflation dynamics at the “zero-lower-bound” (including the need for negative real interest rates), and most importantly the refusal to continuing plying fiscal stimulus, are perhaps the best answers to the question of this post.

And depth of the hole is no excuse.  If anything, that was a reason to do more.  You wanted your policy makers to look at the figure below when jobs were at their trough in early 2010 and conclude: “we’re going to need to significantly beat the slope of the last recovery or else we risk not breaking new ground until…um…as late as May of 2014!”  And I can assure that some of your policy makers, or at least their economists, were saying something much like that at the time.

In this regard, political dysfunction is an important part of the answer to “why so long…”

–Unique factors regarding the housing bubble, the wealth effect, balance sheets, etc: One meme here is that busts that result from the collapse of finance are always more protracted than those that result from a supply shock, be that shock exogenous—a disruption in the supply of a key input like oil—or endogenous—the Fed slams on the monetary brakes to prevent overheating.

Meh…I don’t doubt for a second that the loss of trillions in wealth from the bursting of the housing bubble was a factor in the depth of the downturn.   We’re a 70% consumer-spending economy and that’s a huge downshift in the wealth effect.  Nor do I doubt that debt bubbles are more pernicious and long-lasting than mark-to-market equity bubbles.  Banks can’t play extend-and-pretend in the latter case, for example, and deleveraging, risk aversion, the “Minsky moment” (flip from under-pricing to over-pricing risk)—they’re all real factors that made the GR tougher to grow out of than many of its predecessors.

But—and this is my biggest punchline of the downturn, my “what-did-you-learn-Dorothy?” insight—every freakin’ one of these problems was known and was movable by better policy.  Mostly temporary fiscal stimulus to offset the demand contraction of the negative wealth effect, but also debt reduction (cramdowns, principle reduction) to clear out that channel as well.

–Trade deficits: The fact that we went into the downturn with large negative trade imbalances meant we went in with a major drag on domestic labor demand, well before the collapse (trade deficit/GDP in ’06 and ’07: -5.5% and -4.9%, historically very big numbers).  That means we jumped into a deep hole with a heavy anvil around our neck.

–Inequality: The expansion began in the second half of 2009, but the fact that what growth we’ve generated has gone mostly to the top has likely played a role, again through the consumer spending channel.

–Hysteresis: Or as I like to mellifluously describe it, “once you bend the trend, it’s hard to mend.”  See here for details, but once all the factors above were working to slow growth, cyclical problems from the recession became structural ones in the recovery.  This is most clearly seen in our depressed labor force participation rate, but the fact of large and persistent gaps in output, jobs, and wage growth this late in the expansion are equally visible forms of proof.

–Global interconnectedness: The fact that so many other economies weakened along similar time frames to our own also made it tougher to more quickly recover.  There was a period in there somewhere when practically every advanced economy was talking about export-led growth, the arithmetic of which doesn’t quite work (somebody’s got to import).

I’m sure there’s more but I’ve got other stuff to do.  I’ll add other entries as they bubble up.  And sure, it’s fun to make lists, but the point is to learn from our mistakes.  Or, at least that would be the point if we were capable of doing so.

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16 comments in reply to "What Took You So Long?"

  1. Smith says:

    Debt overhang lasts longer because very important changes were made that effect the economy.
    1) Student loans at $1 trillion now exceeds consumer debt. The loans are huge, they are long lasting, they are new to the economy. Although the average amount of $25,000 is close to the size of one or two car purchases, that’s still significant enough to change the finances of the 37 million with loans (equal in size to 1/3 of the 120 million full time workforce). Furthermore, changes to bankruptcy law in the 1990s and 2000s prevent the loans from being dischargeable. This and federal guarantees encourage tuition hikes without end. The burden falls most heavily on poorer students at for-profit institutes who drop out before graduation. http://www.asa.org/policy/resources/stats/
    2) Bankruptcy law changed, especially in 2005, to prevent people burdened by debt from getting a fresh start. Basically unless you never work again, bankruptcy no longer exists. This is in violation of the United States Constitution since Article 1, Section 8, Clause 4 authorizing federal regulation obviously implies it’s very existence. It removes moral hazard of banks not to make risky loans and entice consumers with unaffordable ill advised borrowing.
    http://en.wikipedia.org/wiki/Bankruptcy_Abuse_Prevention_and_Consumer_Protection_Act_of_2005
    3) People in debt are much worse off, not just because of bankruptcy law, but because state usury laws were effectively nullified by a court decision in 1978. Interest rates once limited to around 13%, now reach 30% or more, (more due to late fees and servicing fees). http://en.wikipedia.org/wiki/Marquette_Nat._Bank_of_Minneapolis_v._First_of_Omaha_Service_Corp. This affects the poor and the broke the most.
    4) The above three points are missing from public debate and all are recent financial innovations bought and paid for by banks (Bernie Sanders tried to pass an interest rate cap of 15% in 2009 garnering 33 other Senators in support) http://thecaucus.blogs.nytimes.com/2009/05/13/senate-rejects-limit-on-credit-card-interest-rates/ Principle reduction is however is cited above.
    What is missing is the scandal of a Democratic President not helping people losing their homes, foreclosures still running twice the historical rate.
    “There has been an expectation that FHFA Director Mel Watt, a former House Democratic lawmaker, would adopt the principal forgiveness policy at Fannie Mae and Freddie Mac but, so far, he has not made that move in three months at the helm.
    “Fannie Mae, Freddie Mac won’t reduce loan limits, regulator says”
    “http://www.latimes.com/business/money/la-fi-mo-fannie-mae-freddie-mac-loan-limit-mel-watt-housing-20140513-story.html Studies show reductions would help everyone.
    http://www.cbo.gov/publication/44115 Political weight and rhetoric would need to be employed to counter arguments that people with jobs and savings are unfairly disadvantaged by other people not getting thrown out of their houses. There must be a great benefit to some (banks hiding and delaying losses) or this would not occur. But it’s a sad commentary on Obama’s presidency and legacy that will not escape the historical record.


    • Robert Buttons says:

      “The burden falls most heavily on poorer students at for-profit institutes who drop out before graduation”.

      We need to realize, like Europe, that not every student has the brain power for college. We need more vocational training, more apprenticeships and fewer market-distorting subsidies for college.


      • Smith says:

        Europe, especially Germany, tends to track students away from homogenous college preparatory work in high school and earlier as a means to efficiently allocate resources and also prepare students for the existing labor market.
        That system does not mean nearly every student doesn’t have the brain power for college. How convenient is it for those fortunate enough to be able to beat out those in competition for a college education to be able to say they won on merit. I’d favor more vocational training, apprenticeships and changing the system of college subsidies. But one should realize that practically everyone does have the brain power for college and there is data and science to back that up (just on I.Q. distribution alone, Charles Murray’s Bell Curve notwithstanding). Do you think the average college student taking an introductory calculus course is as smart as Issac Newton or Gottfried Wilhelm von Leibniz? No, because you don’t have to be a genius to do college work, and you don’t have to go to college to figure that out.


        • Robert Buttons says:

          Let’s test your thesis of ” practically everyone does have the brain power for college ” I will find a random cohort of IQ 70 (-2SD) HS students and you can hold their college loans? Myself, I would be more than willing to hold loans for a group of IQ 130′s (+2SD).

          We already know we can predict life outcomes by SAT at the young age of 13:
          https://my.vanderbilt.edu/smpy/files/2013/01/PsychScience2006.pdf


          • Smith says:

            Interesting. Taking a cohort of IQ 70 makes no sense since this level is at or near a threshold below which one associates with having a learning disability. Thus one would reasonably assume 70 to be the floor for purposes of this discussion meaning a cohort from 70 would cover everyone instead of practically everyone. There are studies on programs to assist those in the 70-79 range.
            http://www.queensu.ca/accessibility/sites/webpublish.queensu.ca.qahwww/files/files/research/Mild%20Intellectual%20Disability.pdf
            However if we use a higher threshold of 85 for those who might benefit from a college program of some sort, (whether two or four year with or without assistance), then we get nearly 90% (88.54%) which is practically everyone. (the math is 1 SD = 85/96 because the 4% under 70 aren’t included)

            Even so, I couldn’t take your bet because only 60% of those at 4 yr colleges and 30% at 2 year colleges finish in 1 1/2 the time allotted (within 6 and 3 years respectively) Only 68% start college so the overall (4 and 2 year) completion rate falls to 30 something, vs. my asserted 90% potential. Those at the lower end, who I’d be backing, probably fare the poorest.

            The adult population with four year degrees is around 30%, equivalent to percent level of high school in 1945, which should give you pause. http://en.wikipedia.org/wiki/Educational_attainment_in_the_United_States
            There is also the Flynn effect to consider.

            Predictions made at age 13 based on SAT scores do not necessarily indicate a fixed capabilities or limitations. How could the scores not be heavily influenced by environmental factors? Most research indicates a mix of nature and nurture determining outcomes.


          • Smith says:

            Technically 1SD = is .8413, not 85, so the practically everyone is 87.63, not 88.54. However the lower tail distribution is not actually normal, so the 4% excluded of 70 or below taken from a z table is actually higher.


          • Robert Buttons says:

            Community colleges have only a 20-25% completion rate. When you factor in opportunity cost (a concept forgotten in “modern economics”), how much is pushing college on the inept and more importantly the highly-able-but-not-fit-for-the-hogwash-taught-in-college crowds costing our economy?


          • Smith says:

            The U.S. is well able to afford 4 years of post secondary education for everyone. 25 million 18-24 year olds * $5,000/year = $125 billion Add $25,000/year opportunity cost and the total is $725 billion or 4% of GDP. This is small potatoes and doesn’t count possible future productivity improvements from better educated workforce, and represents total cost before subtracting the portion we already currently spend for the privileged and fortunate (1/3 of that) or spent for two year programs or students who do not complete degrees.
            http://en.wikipedia.org/wiki/The_Affluent_Society
            But there is an arms race in credentials. In 2009-2010, there were 750,000 graduate degrees (610,000 masters, 145,000 doctorates) vs. only 1,600,000 bachelors. Put another way, the trend indicates 46% go to graduate school, less duplicates from multiple degrees. http://nces.ed.gov/fastfacts/display.asp?id=72

            1899
            THE THEORY OF THE LEISURE CLASS
            by Thorstein Veblen
            Chapter Fourteen
            The Higher Learning as an Expression of the Pecuniary Culture
            “The recondite element in learning is still, as it has been in all ages, a very attractive and effective element for the purpose of impressing, or even imposing upon, the unlearned; and the standing of the savant in the mind of the altogether unlettered is in great measure rated in terms of intimacy with the occult forces.”
            http://www.gutenberg.org/files/833/833-h/833-h.htm


  2. Peter K. says:

    I agree with all of this. Let me add some half-baked ideas. Regrading the chart at the bottom? 81-82 was a Fed-induced recession. Why did the subsequent recessions get worse and worse in terms of severity and job growth? Rising inequality?

    DeLong points out that they did a much better job sorting out the debts of the savings and loan crisis via the RTC. How much bigger was the fiscal and monetary stimulus this last time around? I believe the fiscal stimulus worked (it’s settle fact) but it was weighted too much towards tax cuts and not enough aid to the states and local governments. As Grunwald pointed out, Democrats didn’t want to give money to Republican governors who might run for the Senate. Republicans didn’t want to let states off the hook. Just as Summers says they didn’t have 60 votes for cram-downs and principle reductions b/c they didn’t want to let homeowners off the hook. DeMarco blocked executive action (which was seen as a political loser anyhow.)

    And really I believe Bernanke will look like an utter failure in the history books and more to blame than Obama (who nonetheless didn’t make it a priority to nominate good people to the FOMC). Obama had to deal with Congress. The Fed is supposed to be independent. I believe the Fed should become like an economic Supreme Court even if it makes it a lightening rod. They should be the last word in economic debates just as the Supreme Court is the last word when it comes to the law. Instead Bernanke would refuse to answer questions in Congress because they were too political. Yellen should say often and loudly how austerity makes their job harder and increase financial instability by placing to much reliance on monetary policy.

    The Fed should have set a higher inflation target. It should have done more. More QE. A regime change with Rooseveltian Resolve as Romer put it. Yes there would have been a backlash, but there already was one and even now Taylor and rules-based people are spreading nonsense about how the Fed did too much and should have raised rates a while ago.

    Financial instability needs to be attacked by means other than high interest rates and ending QE too soon. Yes you lose jobs to the post-bubble bust, but you also lose jobs to hysteresis and inadequate demand management. Had the Fed hadn’t done QE, how much shallower would red line be?


  3. Robert Buttons says:

    Austerity is a myth. Ditto the myth of lack of demand. Veronique de Rugy demonstrated the myth of European austerity. We had record deficits, record national debt, record consumer debt and discretionary consumer spending is back above pre-crash highs.


  4. Smith says:

    Austerity is not a myth. Admittedly Krugman is not an unbiased observer, and sources are not cited from whence the data for the graph is derived, but I doubt he’s making these numbers up. krugman.blogs.nytimes.com/2013/12/12/unprecedented-austerity
    Ditto lack of demand
    http://www.capitalspectator.com/is-aprils-drop-in-consumer-spending-a-false-warning/
    de Rugy doesn’t seem to deny European austerity but rather claims it was implemented incorrectly with tax hikes instead of spending cuts.
    http://www.heritage.org/research/reports/2014/06/europes-fiscal-crisis-revealed-an-in-depth-analysis-of-spending-austerity-and-growth#_ftnref8
    Following sources referenced (not behind a paywall) seems less encouraging, reading terms like “less likely to cause recession” and “certain combinations of policy” don’t exactly inspire confidence.
    http://www.nber.org/papers/w15438.pdf
    Obviously WWII blows past any notion of record debt. Absent war, the increase rivals early Great Depression measures, and similarly are helpful but inadequate to the job.
    http://en.wikipedia.org/wiki/National_debt_of_the_United_States#mediaviewer
    /File:Federal_Debt_Held_by_the_Public_1790-2013.png

    The 2% above previous years indicates the level never recovers the lost trend from recession by going above average.
    http://seekingalpha.com/article/2251293-consumer-spending-on-necessities-vs-discretionary-goods-signals-mid-cycle-turn
    On a smaller scale spending is up but not at previous levels.
    http://www.gallup.com/poll/170816/consumer-spending-hits-six-year-high.aspx


    • Robert Buttons says:

      Krugman magically switches between his favored inflation measures (CPI vs PCE vs core CPI) to suit himself.

      As a percent of GDP, total govt spending is way above pre crash baselines:: 34%(2006), 34%(2007), 356%(2008), 41%(2009), 40%(2010), 40%(2011), 38%(2012).

      Record trade deficits (http://www.tradingeconomics.com/united-states/balance-of-trade) and rising consumer debt (http://www.marketwatch.com/story/us-consumer-credit-surges-in-april-2014-06-06) contradicts the meme of “lack of demand”


      • Smith says:

        The numbers and trends in Krugman’s graph are so strong that it’s hard to imagine the different ways of measuring inflation have any effect. This is especially true because a) inflation has been low for a long time and b) the graph represents three year moving averages.

        Moreover, comparing GDP to government spending in no way refutes the actual historical drop in spending trends. Where Krugman might be accused of cheating, which you didn’t catch, is the three year average exaggerates the drop following the crisis induced stimulus. But if you run the numbers, this seems not to matter because a mere 2%/year (after inflation) increase in government outlays leaves one exactly where we are now. Clearly, the graph shows spending growth rarely dips below 5% but is not instead close to 0. Another way of cheating though, ignores the larger size of government spending in the economy or whether 5% growth is actually a good thing.

        Using GDP ratios is misleading because GDP is currently far below where normal growth would have taken the economy, and compounding the effect is the resulting continued automatic extra expense for the counter cyclical safety net programs. But who cares, Krugman cites historical decline year over year growth of government spending, not GDP ratios which of course must rise in downturn however prolonged.

        I can’t find information on inflation measurements even conservative ones, so I’m unable to link to any info on this site. Government reports from census and the like don’t package that data up in any convenient form. We need a Piketty for government spending.
        http://www.usgovernmentspending.com/


        • Robert Buttons says:

          “GDP ratios is misleading because GDP is currently far below where normal growth would have taken the economy,”

          Of course, you are assuming the false bubble economy of 2006 is “normal growth” and we should extend the trend line from there. One can only consume what is produced (Say’s Law), so, yes, GDP is an excellent indicator.


      • Tom in MN says:

        Good thing that GDP never changes during a recession so it’s always a good number to compare to.


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