08 March 2010|
When it comes to employment, we have dug ourselves a tremendous hole. I will be surprised if unemployment is back to where it was four years from now. This chart gives us all an idea why:
Of particular interest is the path of the last two recessions which had anemic job growth despite relatively shallow initial dips. The recovery period for each far exceeded previous recessions. If we see a repeat this time the V shaped recovery in employment we keep hearing about is not going to happen. So why the difference?
The earlier recessions exhibited a similar pattern of sharp drops in employment followed by sharp recoveries as the economy snapped back. The change that we began to see in the 1990 recession is partly structural. The layoffs associated with the much larger manufacturing sector in recessions of the past were associated with a rundown in inventories which then snapped back once the inventories were depleted.
Something else is going on here as well in my own opinion. As the eighties gave way to the nineties the US was in the early stages of an experiment in monetary and economic policy. Monetary policy was explicitly geared to reduce economic volatility. This led to attempts to reduce the severity of recessions, and also led to a reduction in upside volatility as well. This was (at least for a while) somewhat successful, resulting in what became known as "The Great Moderation." The recession of 1990 was the first crack in that system. Attempts to limit volatility not only reduced the violence of the recession, but the explosive growth typical after recessions previously. It also was a recession which was a result of a financial crisis (the S&L's) and the real estate boom of the late eighties. The deleveraging of the finance and debt recession (what we are going through now, only in miniature) was sluggish. It took a good while for the adjustment to occur.
We followed a familiar script of lowering interest rates and encouraging credit expansion. Constant expansions of credit whenever things slowed kept the engine running until a bigger crisis hit with the bursting of the tech and telecom bubble. Once again we applied even more credit easing to soften the blow, and the attempt to avoid wringing the excesses of credit from the system led to another sluggish recovery with anemic job growth. Profits however were large and the return for the steadily growing financial sector was immense. If the economy was going to be stabilized by constant applications of credit expansion, then the financial sector was the main beneficiary. Finally we have the latest crisis, one where the financial system itself was the most important bubble.
What we can now see is that the types of recessions we have been experiencing are successive deleveraging cycles, each "solved" by releveraging the economy and leading to a bigger crisis down the road. Sadly deleveraging processes, especially if drawn out by keeping them from running their course, result in tepid job growth. We are now in a massive deleveraging cycle which we are once again trying to solve by adding massive debt to the system. Once again job growth and recovery is slower. Unless we break this cycle (which would be very painful) we should expect nothing different in the outcome, except that the problem is bigger and will last longer.