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December 7, 2014

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Posted: 07 Dec 2014 12:06 AM PST

'Comparing Postmodern Recoveries'

Posted: 06 Dec 2014 10:13 AM PST

In my very first piece for CBS news back in early November of 2009, almost a year and a half into the "recovery", I wrote an article saying that unemployment may not fully recover until 2013, four years later. The editors (who were different at the time than they are now) asked me a couple of times if I really wanted to be that pessimistic, and I said yes, I did. I honestly thought it would take that long, I wasn't just trolling (it was based in large part on an SF Fed forecast that output would recover in 2012 which turned out to be overly optimistic). And I kept warning from then on (as I had even before then here) that the recovery would be slow.

In the article I said:

... The reason for the slow recovery is partly due to the depth of the recession -- the deeper the hole, the longer it takes to crawl out of it -- but it's also because of the large amount of structural change that the economy must go through before it can recover. Prior to the recession we had too many resources in the housing, finance, and auto industries, and it will take time to move the people and resources who used to work in these industries into areas of the economy where they can be employed productively. And as new productive activities outside these areas arise, firms will install the best technology available. This technology will, in general, be more capital-intensive than before, and so we will need to surpass the pre-recession level of output before the demand for labor will return to its previous level. In addition, firms typically reorganize their job assignments after layoffs and discover that the same work can be performed with fewer workers and this, too, can slow the recovery period for employment relative to output.

The bottom line is that there's still a long road ahead, particularly for labor, and for that reason I am very much in favor of additional government policy targeted directly at the employment problem. In addition, given the record levels of long-term unemployment we are experiencing (those unemployed 27 weeks or more now constitute 35.6 percent of the unemployed; see here for a graphical representation of the situation), the recent vote to extend unemployment benefits was overdue and very welcome.

I also emphasized the delayed peak of unemployment relative to the trough for output in the previous recessions, and expected that to contribute to the slow recovery, but that didn't happen this time -- so I got that particular detail wrong (though not the more general idea of a jobless recovery like the previous two). And as time progressed, I began to also emphasize the problems households have in recovering from the losses they incur in a "balance sheet recession" -- that takes a long time -- but that was not part of this argument.

In the end, while I thought I was being pessimistic, four years to recover?, I was not pessimistic enough (though the pessimism was updated over time) and we are still waiting for full recovery.

On that note, Paul Krugman says today:

Comparing Postmodern Recoveries: Very early on — in fact, long before the 2007 recession was either declared officially, or admitted as reality by those still touting a Bush Boom — some of us warned that recovery would be slow, and initially jobless. Why? Because this was a postmodern business cycle, brought on not by monetary tightening but by private-sector overreach, and hence harder to turn around than, say, the 1979-82 slump. Nonetheless, as Menzie Chinn notes, a constant talking point on the right has been that slow growth showed the damage done by Obama policies. And not just at Heritage or whatever; people like Ed Lazear or John Taylor demonstrated the reality of the hack gap by asserting that the private sector wasn't creating jobs because Obama was looking at them funny; also Obamacare.
How could you test this? Well, when I began talking about postmodern recessions, I argued that the 2007 slump was the third such example — that 1990-91 and 2001 were also postmodern recessions, followed by jobless recoveries. I'll leave 1990-91 aside for now, because I'm lazy, and just note that we now have enough information to make a clear comparison between the recovery that began in 2001 and the one that began in 2009. ...
By any standard I can think of, the Obama-era job recovery has been stronger than the Bush-era job recovery. Now, I don't think that reflects excellent policies; and I would argue that in some ways the depth of the preceding slump set the stage for a faster recovery. But the point is that the usual suspects have been using the alleged uniquely poor performance under Obama to claim uniquely bad policies, or bad attitude, or something. And if that's the game they want to play, they have just scored an impressive own goal.

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