10/24/10 1:50 PMHoisted from Archives: The Jobless Recovery (July 20, 2009) - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchJuly 18, 2010

Hoisted from Archives: The Jobless Recovery (July 20, 2009)

You know, I really wish that I had not been just talking to myself...

From July 20, 2009: The jobless recovery has begun - The Week: Last December,economists forecast [average] 2009 unemployment at 7.8 percent. As of this writing, itseems likely to be 9.3 percent or higher—at least 1.5 percentage points higher thanoriginally estimated.... [T]he next stretch of road bears all the marks of a joblessrecovery. Back in the 1960s one of President Johnson's economic advisors, BrookingsInstitution economist Arthur Okun, established a rule of thumb quickly named "Okun'sLaw"... swings in unemployment will always be half or nearly half the magnitude ofswings in GDP. Why? Four reasons: (a) businesses will tend to "hoard labor" inrecessions, keeping useful workers around and on the payroll even when there istemporarily nothing for them to do; (b) businesses will cut back hours whenunemployment rises, reducing output more than proportionately because total hoursworked will fall by more than total bodies employed; (c) plant and equipment will runless efficiently when hours are artificially shortened; and (d) some workers who losetheir jobs won't show up in the unemployment statistics, choosing instead to retire ordrop out of the labor force....

According to Okun's Law, the unexpected extra 1.2 percent decline in real GDP in 2009should have been accompanied by a 0.5 or 0.6 percentage-point rise in theunemployment rate. Instead, we experienced a 1.5 percentage point rise.... [E]videncehas been mounting that Okun's Law is broken—especially with regard to the retentionof workers in a downturn. In 1993—two full years after the National Bureau ofEconomic Research said that the 1990–1991 recession had ended—the unemploymentrate was still higher... than it had been at the recession's trough. We saw this samekind of "jobless recovery" after the recession of 2001. It wasn't until 55 months after

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10/24/10 1:50 PMHoisted from Archives: The Jobless Recovery (July 20, 2009) - Grasping Reality with Both Hands

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that recession ended that a greater share of Americans were working than had beenworking before the contraction. Now in 2009... get ready for another joblessrecovery....

Paul Krugman has a theory:

[Past] recessions . . . were very different. . . . Each of the slumps—1969–70, 1973–75, and the double-dip slump from 1979 to 1982—were caused, basically, by highinterest rates imposed by the Fed to control inflation. In each case housing tanked,then bounced back when interest rates were allowed to fall again. Since the mid1980s, however . . . recessions haven't been deliberately engineered by the Fed,they just happen when credit bubbles or other things get out of hand. . . .[T]hey've proved hard to end . . . precisely because housing—which is the mainthing that responds to monetary policy—has to rise above normal levels ratherthan recover from an interest-imposed slump.

I'm guessing there is another set of factors at work. Manufacturing firms used to thinkthat their most important asset was skilled workers. Hence they hung onto them,"hoarding labor" in recessions.... Skilled workers were the franchise. Now, by contrast,it looks as though firms think... their procedures and organizations that are keyassets.... [F]irms believe that their remaining workers will forgive them if they firelarge numbers of workers during a recession out of economic necessity....

At least it is likely to be a recovery. The prevailing forecast right now is for realGDP... growth between the second and third quarters... the NBER Business CycleDating Committee... is most likely to call the end of this recession for June2009.... Yes, that would mean the recession is over right now. One reason for thatis the much-maligned stimulus package, which probably boosted the real GDPannual growth rate by about one percentage point in the second quarter of 2009,and will boost it by another two percentage points between now and the summerof 2010....

Politically, the question "did the stimulus work?"... answered in the affirmative.Democratic members of Congress seeking reelection in 2010 will be able to pointto real GDP growth and an official end to the recession in the second quarter of2009. However, that is probably not the most relevant question to ask.... Barringmuch faster real GDP growth than is currently in the cards, we appear destined foranother jobless recovery. So the answer to the question "did the stimulus work?"depends on the metric you use. If the metric is the unemployment rate, the answeris... it was too small.

Brad DeLong on July 18, 2010 at 11:53 PM in Economics, Economics: Macro |Permalink

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Travis said...I'm guessing there is another set of factors at work. Manufacturing firms used to thinkthat their most important asset was skilled workers. Hence they hung onto them,"hoarding labor" in recessions.... Skilled workers were the franchise. Now, by contrast,it looks as though firms think... their procedures and organizations that are keyassets.... [F]irms believe that their remaining workers will forgive them if they firelarge numbers of workers during a recession out of economic necessity....

Professor DeLong, the Atlanta Fed President looks to say somewhat of the same thing:

http://www.frbatlanta.org/news/speeches/lockhart_060310.cfm

In recent months, the U.S. economy has enjoyed especially strong productivity growthin the business sector (averaging 6 percent per quarter over the last three quartersversus the long-run average of 2.6 percent). I suspect that much of this productivitygrowth is of the second, work-harder type. Many employers reacted to the downturn byaggressively cutting their workforces, reorganizing remaining workers, and cuttingother costs. They have reacted to the upswing by holding employment at or nearrecession levels, seeking efficiencies in supply chains, investing in labor-savingautomation, and generally tweaking their business models to operate more efficientlythan before the recession. We've heard this story frequently in anecdotal accounts ofour directors and business contacts across the Southeast.

As long as efficiency and productivity gains can be achieved in this way, employers mayremain hesitant to hire.

Reply July 19, 2010 at 07:40 AMbakho said...On top of the financial crisis, the oil shock of 2008 collapsed auto manufacturing. In2006, the US was making over 16 million units per year. This year, the final numbermay be below 10 million. Auto manufacturing ALWAYS drops in response to an oilshock. However, this time is somewhat different. Prior to 2008, automakers pursued asupply push strategy aimed at maintaining market share. That meant that BigAuto wasselling some units at less than cost. BigAuto has shifted to demand pull. When salesdrop by over 40 percent in an industry that has over 2 million workers, job loss and theripple effect will be a big factor.

The manufacturing sector throughout is undergoing the same level of mechanizationthat reduced employment in agriculture in the 1920s. Skilled artisan labor has beenreplaced by computer driven tools. This increases the productivity and changes the skillset. We are transitioning from a time when a large portion of our workforce wasengaged in manufacturing to a downsized labor force. This is a huge structural changethat needs a structural response. Even during economic expansions, the numbers ofmanufacturing workers have declined. Our politicians do not seem to recognize thatthe change is structural and that we need BigG to help with the transition. We have thelabor capacity to manufacture new stuff or to offer more services. The BigG can do alot to help overcome the barrier costs to manufacturing new stuff or building publicinfrastructure.

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People like to point to WWII as the stimulus that ended the Great Depression.Sometimes overlooked is that the military is a very large education and workforcetraining organization. The fledgeling US electronics industry got a boost from militarycovering the costs of training. WWII also trained large numbers of people in warehouseand supply management, trucking, etc. etc. Post WWII, the GI Bill provided a largeamount of funding for continued workforce training and expanded the number of jobsin the University sector including a lot of service jobs.

Looking for housing to lead us out of the recession is worse than usual, becausehousing is overbuilt and the glut will take a while to work off.

Reply July 19, 2010 at 08:11 AMbakho said..."But if there is a lesson for the US to learn from the Germans, or indeed from justabout any other major economy, it is on the merits of having an industrial policy.

One key part of this effort is state support for a public and quasi-public technologyinfrastructure at the applied end of the R&D chain. The Fraunhofer Society, which isan umbrella group for about 40 research institutes, is intended to fill the gap betweenbasic and company-based industrial research. While most of the research is driven byindustry contracts, the infrastructure of the Fraunhofer Society is publicly funded.

Germany is also one of the biggest promoters of basic research; with 20 percent oftotal world expenditures on basic science, it takes second place behind France (with 21percent) and ahead of the US (with 16 percent) and Japan (with 12 percent). Given thatthe US is a much larger economy, $14.256 trillion versus $2.182 trillion, USunderinvestment in basic scientific research should be painfully obvious. In addition tothe basic research performed in the university system, the state also supports basicresearch through the Max-Planck Society, which is an umbrella organization for about60 specialized research institutes focusing mainly on different areas of physics, biology,chemistry and medical research. About four-fifths of its budget comes from the federaland regional governments.

Germany also boast a publicly financed vocational training programme that works withthe private sector. Vocational education and training is a joint government-industryprogram, one of these public-private enterprises that are common outside the UnitedStates. The federal government and the Länder(German states) share in the financingof vocational education in public vocational schools, with the federal governmentbearing a slightly higher share. Known as the Dual System and created in 1969, manyeconomists point to Germany's vocational training programme as one of its competiveadvantages. Indeed, about 65 percent of the country's workforce is trained through thevocational education system.

In the United States, industrial policy has been traditionally largely set by venturecapital and investment banks but over the past two decades our financial sector hasmorphed into glorified casinos instead of performing their traditional role of pickingwinners. Bring up the idea of an industrial policy, you are likely to be met with epithetsof being a Marxist. And the idea of education as a public good, thanks to RonaldReagan and the Friedmanites, is an anathema. Let me remind you that there are thosewho not only want to disband the Department of Education but to destroy the publicschool system itself. And in case it's not obvious, Germany's fiscal prudence is notburdened by an Empire. Germany spends but 1.28 percent of GDP on its militarywhereas we spend 4.16 percent. If you want to talk about restoring sanity to our insanespending, let's start there."

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Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEricRauchwayand FriendsJohn Holboand Friends

http://mydd.com/2010/7/18/germany-is-not-the-united-states

Reply July 19, 2010 at 10:47 AMComments on this post are closed.

Economics Is not a Morality PlayNew York Times (blog) - Sep 28, 2010Brad DeLong catches someone wondering if I am actually advocating war as asolution to our problems. Against stupidity, the gods themselves … ...Related Articles » « Previous Next »

economics DeLong

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