A Picture of Pain (and Confusion)

Want to see something ugly? Look at this chart from the Calculated Risk blog:

Note that the steep initial fall in employment in the recent (2007) recession was similar to the trajectories in 1948, ‘53, ‘58, ’60, and ‘70.  However, in those episodes, there was a strong snap back after one to two years; 1974 showed the steepest initial drop, but turned around after six months and recovered after fifteen. 

Employment losses in the recessions of 1969 and 1980 were shallow and short.   1981 was not pretty, with employment falling by 3%, and taking over two years to recover.  1990 was fairly shallow, but was drawn out over two and a half years.  2001 followed a similar trajectory to 1990, but employment declined a bit further and was depressed for longer, taking almost four years to recover. 

If you were looking at those data before 2007, you might infer that recessions were becoming longer and shallower, perhaps due to continuing innovations and improvements in macro policy (e.g., counter cylical stabilizers, transparency, better managed expectations), shifts in the composition of the domestic economy (e.g., towards less cyclical industries), closer trade and financial integration, demographics, etc.  It also looked like there was a clear tradeoff, in terms of job losses, between the depth of a recession and its duration. 

But we’re now faced with a downturn in which employment has contracted by over 6%, its deepest decline in the post war period, and it’s painfully clear that a full recovery will take much longer than it did in the 2001 recession.  In other words, the depth and duration tradeoff is dead this time around.  We’ve got the worst of both for the first time since the Great Depression.  It’s not entirely clear what roles macro policy, economic composition, trade and financial integration, demographics, and other factors are playing this time around, though most of us have our theories, of course.

While the turnaround that started in early 2010 is a welcome sign, there’s clearly a long, tough slog ahead.  Advocates of austerity or ”fiscal (in)sanity” (in our view that includes anyone who wants to raise taxes or lower spending) have to take this reality into careful consideration.  And those who would assert that current unemployment levels reflect a new equilibrium that we have no choice but to get used to should be prepared for a long, tough political slog; one that’s sure to be accompanied by plenty of (undesirable) social intrigue.

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