Do You Believe in Magic?
We’re sure to see all kinds of economic reporting in the days and weeks ahead purporting to show that there’s no need for more concerted, large-scale action to address the jobs crisis. Highly detailed historical analyses will be used to try to bolster the argument that jobs will come back because “they always do”, that recovery is “just around the corner”, so there’s no need for new job-creation initiatives.
Under the curious headline Steep Job Losses Offer Hope for Fast Rebound, Floyd Norris, chief financial correspondent for the New York Times began his weekly “Off the Charts” column Jan. 16 asking:
Will labor markets in the United States remain weak for an extended period?
For many economists, the answer is yes. They point to the “jobless recoveries” that followed the two previous recessions, in 1990-91 and 2001, and see no reason this recovery should be any different. That has led some to call for a new round of stimulus spending.
But then comes the “but”:
But history indicates there may be more hope for a fast rebound than is generally expected. The two jobless recoveries were preceded by recessions in which employment declines were modest. But after recessions involving a sharp drop in employment, the rebounds have been much stronger.
Citing historical graphs, Norris makes the case that the sharp 5.2% increase in unemployment from December 2007 to October 2009 makes this recession comparable to the three other post-World War II recessions with steep job losses — the recessions of 1957-58, 1960-61 and 1981-82.
And because those three recessions were followed by rapid recoveries with sharp jobs increases, Norris contends, jobs may come back faster after this recession as well.
Or at least that’s the hope that is dangled before us. The two not-so-scientific assumptions being made are: first, that the economy is somehow magically guided by past statistical data; and second, that the current Great Recession is actually comparable to those previous three recessions. Since the first assumption should need no further explanation, let’s look at the second.
The recessions of 1957-58, 1960-61 and 1981-82 all did have sharp declines in employment, but none of them matched the depth of the current downturn. An even bigger difference is the record percentage of long-term unemployed in this recession. Currently more than 1 in 3 jobless workers have been out of work for 27 weeks or more. Longer durations of unemployment tend to make finding a new job even more difficult. And the sheer number of long-term jobless has exploded.
The Paper Economy blog reported two days ago:
Nothing says recovery less than a steadily increasing pool of unemployed workers facing the specter of a quickly increasing average (and median) length stint on unemployment.
In fact, as has been widely reported, the median and average stay on unemployment has simply exploded far surpassing the highest levels seen since records have been regularly kept.
Looking at the charts below (click for super interactive versions) you can see that today’s sorry situation far exceeds even the conditions seen during the double-dip recessionary period of the early 1980s, long considered by economists to be the worst period of unemployment since the Great Depression.
Currently, there are some 6.13 million civilian workers that have been unemployed for 27 weeks or more with the average stay on unemployment standing at a whopping 29.1 weeks and the median stay reaching 20.5 weeks.
Looking at this amazing interactive chart showing the number of long-term unemployed workers going back to 1948 (note: pass your mouse pointer over the chart to match dates and statistics) reveals a number of astonishing facts:
The number of long-term unemployed in the current recession has increased by 4.8 million.
The 6.13 million currently long-term unemployed is twice as many as at the peak of the 1981-82 recession.
There were already 1.325 million long-term unemployed at the start of the current recession in December 2007, a number near the peak of long-term unemployment in the 1974 recession.
That last fact is symptomatic of the relative underlying weakness of the economy prior to this recession compared to the prior ones. Those earlier recessions were preceded by relatively sustained periods of growth in production, employment, infrastructure and average incomes. The same can’t be said of the period preceding the current recession, which was marked by declining manufacturing, job stagnation, neglected infrastructure and declining real incomes for average workers.
And the relative weakness of the underlying economy in the lead-up to this recession was exacerbated by the increasing imbalance in wealth. In 1968 the average U.S. corporate CEO made 20 times the salary of their average worker. Today those CEOs are making more than 400 times the pay of the average worker. And the concentration of wealth has continued unabated, with the top 1% now taking home 23% of all the income in the country.
Still, the most crucial differences between the current recession and its three steep-job-loss predecessors lie in what caused them and in what did, and what could now, serve as the basis for jobs recovering.
The 1957-58, 1960-61 and 1981-82 recessions were all triggered by the tightening of monetary policy by the Federal Reserve, which raised interest rates to control inflation by putting a damper on demand, resulting in a sharp rise in unemployment. The 1981-82 recession was the worst of those for job losses. As economist Dean Baker explains in his great new book False Profits – Recovering from the Bubble Economy when the Fed raised interest rates going into that recession it had the effect of depressing consumer demand for rate-sensitive things like houses and cars. The resulting contraction in construction and the auto industry resulted in significant increases in unemployment especially in those sectors. As bad as it was, it was temporary and readily reversed when the Fed subsequently brought interest rates back down. Built-up demand, existing capacity and a readily reemployable workforce contributed to a relatively rapid jobs rebound.
This recession is nothing like that. Sparked in late 2007 by the bursting housing bubble — rather than by Fed interest rate increases — it was exacerbated by the financial and banking failures brought on by the collapse of securitized asset values as the housing bubble deflated. With the biggest players in the financial system sucking up hundreds of billions and trillions of dollars while lending was choked off, businesses cut costs by laying off hundreds of thousands of workers, month after month.
This time construction jobs, which have been lost every month for nearly three years, aren’t likely to be recovered through new housing construction, as bubble-induced over-construction and the subsequent massive wave of foreclosures has produced a huge housing glut. Similarly, the disappearance of large amounts bubble-induced consumption combined with continued problems in the auto industry make a big jobs rebound there unlikely as well without substantial new, targeted stimulus.
Meanwhile, the Fed had already reduced interest rates to near zero, where they have, mercifully, stayed for an extended time. Since the Fed can’t reduce interest rates further to spur demand, and thus, stimulate jobs — as it was able to in all the earlier recessions — only a large-scale, concerted set of job-creation initiatives, like the five-point plan supported by the AFL-CIO and the Jobs For America Now coalition, can get us on the road to a robust jobs recovery from this recession.
Tags: recession, recovery, unemployment
