Recessions Suck
I’m sorry to be a dismal scientist, but the US economy appears to me and some other economists, including some big shots, to be entering a recession. Most people think we’re already there. (Given lags in data, recessions don’t get officially identified until after the fact.)
But what does recession mean to folks on the ground? How bad is it, really?
Pretty damn bad. Given recent historical patterns, three million more people could join the unemployment rolls, and middle-income families, already squeezed, and with income levels still recovering from the last recession, could lose another $2,500.
Here’s a quick summary of how things tend to go bad in a downturn.
Unemployment, averaging all the way back to the late 1940s, goes up about three percentage points in a recession. Minorities and lower-income workers tend to get hit harder: for African-Americans, whose unemployment rate is already twice that of whites, the average recessionary increase is four points, taking their jobless rate solidly into double digits.
Given how much the economy and the nature of the business cycle have changed over the years, it probably makes more sense to emphasize the last two recessions—those in the early 1990s and 2000s—in these comparisons. These downturns were both milder in terms of length and depth by some measures, like gross domestic product, but quite protracted in terms of job and income losses.
In those cases, unemployment rose 1.3 percentage points over the official recession, and then just about another point in the jobless recoveries that followed. Let’s say the next recession (which may be underway) and recovery play out much like these last two. That implies an addition of three million people to the unemployment rolls.
The reason for the rise in joblessness is, of course, that the engine of job growth stalls in recessions. On average, employment falls by 3% in recessions, but the last two downturns, mild, as noted, by some measures, were followed by so-called “jobless recoveries”: the economy’s expanding but employment continues to contract. With recoveries like that, who needs recessions?
In the 1990s, we ended up losing 1.6 million jobs, on net, before employment began to climb back up in earnest; in the 2000s, we were down 2.8 million. If this recession/recovery plays out that way, we’ll lose 2.4 million jobs.
When recoveries start out like that, it’s hard to get back on track. If the current cycle turns out to have officially peaked around now, it will go down in history as the worst for job creation, by a long shot.
From the last cyclical peak (March 2001) through last month, employment grew 4.5%. The average growth, peak-to-peak, is 13%; for the last cycle, over the 1990s, it was 21%. Had employment grown at that rate over this cycle, we’d have ended up with 10 million more jobs.
All of this labor market weakness translates into real wage and income losses. You can very correctly bemoan the failure of growth over this recovery to reach enough people in the middle class on down, but let us not forget that recessions make their plights even worse…a lot worse. Given the rise in inequality, growth is no longer a sufficient condition for broadly shared prosperity. But it’s still necessary.
The typical family’s income falls in recession, and, what with jobless recoveries, it kept falling for the first three years of the last two recoveries, by an average of -4%. If that happens this time, we’ll be talking about losses in the $2,500 range for middle income families.
For low-income families, the declines would be steeper, down 9%. That’s why poverty goes up in recessions/slow recoveries, by just about two percentage points in the last two cases. If this recession has a similar impact, we could end up adding 5.5 million people to the poverty rolls, including 1.7 million children.
Reflecting back on the inequality point above, remember, poverty actually went up in this cycle, and as of 2006, the real income of the typical (median) family had not regained its prior peak, the first time that dubious achievement has ever occurred. So it’s not like families have a lot of economic padding to sustain a downturn.
All of which is why we’ve got to take steps to avoid a recession at best, or at least offset its impact. We at EPI have been thinking hard on that very point lately and have a good plan—a fiscal stimulus—to regenerate growth and avoid these outcomes (others have good ideas too).
Again, I’m sorry for all the downtrodden statistics, but as you see, the stakes are awfully high.
Comments (35)
Isn't this the way capitalism is supposed to work? Ideally - what is ever ideal - a proper little equilibrium, or, too many goods chasing too little money, bad, or alot of money chasing fewer goods, good?
The cycles are predictable, built into the system. So by this time one would think capitalists would have some nice little formula to plug in and save us all. Especially hedge-funders whose $50,000,000 income might be threatened with a rise in their 15% income tax rate. Horrors.
January 11, 2008 2:31 PM | Reply | Permalink
The bad news is not your fault, Mr. Bernstein.
The cycles would be one thing without the really damaging inputs like war and energy costs. It can't be a trivial issue that oil costs five times what it did when Bush took office. It can't be a trivial issue that a few hundred thousand of our most energetic citizens are wasting time and effort in Iraq. It is not trivial that tens of thousands of those eager workers and soldiers are now casulaites. And it is not trivial that we have spent the better part of a trillion bucks there, too.
And the stock market, while not an indicator of my home finances, has not made more than trivial progress since 2000, and is looking to fall below 12,000 again. Nice work, conservatives.
Conservatives have learned something from history--lie about it so no one learns the truth, that they only want to steal, that their policies benefit only the wealthy, that they cannot be run indefinitely and must be repeatedly cleaned up by responsible liberal democrats whoi come in, pay the bills, and restore trust in government.
Speaking of paying bills, remember how existentially, desperately important it was to surveil citizens? Then why has the FBI gone deadbeat on its bills, so that the telecoms stopped surveilling?
January 11, 2008 3:18 PM | Reply | Permalink
Today's conservatives are avowed imperialists and imperialists need relatively healthy cannon fodder to fight their wars, which is probably the only reason we might see any social legislation coming out of Washington in the near future.
January 12, 2008 9:25 AM | Reply | Permalink
The reason for the rise in joblessness is, of course, that the engine of job growth stalls in recessions. Jared Bernstein
Actually, the reason is that workers get laid off (by those companies which are hunkering down) and permanently terminated with just a little less than extreme prejudice (by those companies who before the recession were dead men walking and after, are just dead).
The cause of the jobless recovery is outsourcing and globalization. It'll happen again, but this time a real estate bubble with its attendant job creation won't be there to mask the reality of the slow motion collapse of the middle class.
January 11, 2008 5:27 PM | Reply | Permalink
Thanks to the management of the Bush administration the last seven years, the country is overdue in reaping the economic fruits of Republican leadership. Bush needs only sew up the loose ends of his economic and foreign policy strategies to insure that the legacy of his stewardship of the ship of state will not be forgotten for many, many years into the future.
January 11, 2008 7:19 PM | Reply | Permalink
I think it's the universe conspiring to keep me unemployed. Every time I finish a degree and start looking for a job, the economy's in the toilet. Screw you, Cosmos!
January 11, 2008 7:22 PM | Reply | Permalink
I think that there has been a trend starting in the late 1990's where the US has started to lose its title of "the world's only superpower". At one time this meant not only exceptional military power, but economic as well.
Our military throw weight may still be unmatched, but our ability to get our way by force no longer works. One could say it stopped working after WWII: Korea, Vietnam, etc.
On the economic front much of our economic activity has shifted from material goods into financial services. It is impossible to value financial products properly, as the current melt down shows. The nominal value of such products has been going up, but there is little beyond expectations to justify this. Meanwhile those sectors which have to do with real "stuff" have been in decline.
Wages and income for the median family have stagnated. The number of jobs in manufacturing and agriculture continues to decline. The "service" sector, which is supposed to be the savior, depends a great deal on people using services for things that they used to do themselves. If you have to hire a dog walker, do you really need a dog?
The US is becoming a former empire, just like Spain, Holland, England and many others. What happens during the transition is never pleasant. The working classes get poorer. Economic activity contracts and money available for social services and infrastructure dries up.
In extreme cases the country falls into civil unrest or dictatorship. The US is unprepared for the transition and is even denying that there will need to be a transition. The economic activity of the EU is already greater than the US. Russia, China and India will become major players over the next decades.
The current situation, which I call a "patchwork" recession, is just a bump in the downward road. Promoting "growth" as a solution, even if it shortens the downturn, is not going to alter the long-term trend. Do we want to plan to adjust to our new status in the 21st Century, or pretend it's not happening?
--- Policies not Politics
Daily Landscape
January 12, 2008 7:53 AM | Reply | Permalink
Incidentally, on the issue of the US being #1 super power since the late 90's, that is incorrect. America's status as a leader has been on shaky ground (at best) since at least the early 1970's. For years, the simple act of pointing out America's problems was considered almost treasonous (which is absurd, since---as grown ups learn---you can't fix a problem if you won't acknowledge the problem in the first place). We went through the Reagan era, which pushed the idea that we were God's chosen, while the rest of the world was keenly aware of our growing socio-economic disparities, our soaring prisons populations (due, in large part, to the increased use of super-cheap prison labor), and above all, our contempt for international human rights standards.
America's claim to superiority rested solely on its arsenal. The world has reached the point where one nation can claim they have the power to annihilate the Earth 10 times over while another can claim to have the power to annihilate it 20 times over. It only takes once, folks. We are no longer an economic super-power, and our economic system is bringing us closer to feudalism than at any time in our history. The world does not find this admirable. We have fallen far behind the more modern nations in almost every area, from health care to education to opportunities to earn a living wage. As a whole, Americans have admired themselves tremendously, to the degree where we (as a nation) have rarely even taken time to recognize and resolve our very serious problems.
February 27, 2008 7:27 PM | Reply | Permalink
. . . we’ve got to take steps to avoid a recession at best, or at least offset its impact. Jared Bernstein
"Four-fifths of all our troubles would disappear, if we would only sit down and keep still." Calvin Coolidge
January 12, 2008 8:22 AM | Reply | Permalink
Calvin Coolidge was an economic loser.
January 12, 2008 9:23 AM | Reply | Permalink
Sez who?
January 12, 2008 9:32 AM | Reply | Permalink
See table. CC solidly in bottom quartile.
http://en.wikipedia.org/wiki/Historical_rankings_of_United_States_Presidents
January 12, 2008 10:20 AM | Reply | Permalink
Boy, that's the fastest switch from economics ("economic loser") to polisci I've ever seen.
"You're out of order!"
January 12, 2008 10:18 AM | Reply | Permalink
While Republicans continued to spout the nonsense of supply-side economics, Democrats became the official party of fiscal austerity. The choice became either trickle-down economics or Calvin Coolidge economics. Robert Reich, "Democrats and the Deficit" 5/18/2007
Calvin Coolidge and Bill Clinton! It's all in the timing. Ain't that the truth.
January 12, 2008 11:02 AM | Reply | Permalink
Of course Reich does not actually like to admit the power of the bond market. The problem was not Clinton and Rubin but that Democrats in Congress thought you always had to balance the budget regardless of what the economy is doing.
As you say timing is everything.
Daniel A. Greenbaum
January 12, 2008 12:29 PM | Reply | Permalink
Jared
Not that a recession wouldn't be a bad and painful thing. However, the good folks on CNBC act as if we barely stay out of recession all will be well. Is slow growth nearly as bad for the average Amercan as a recession?
Daniel A. Greenbaum
January 12, 2008 10:37 AM | Reply | Permalink
Damn right, Daniel. The recession obsession is all about whether we "cross zero" in terms of real GDP growth. But a few quarters of well-below trend growth, with trend ~3%, will cause most of the same types of problems I document above. From the perspective of most people's relationship with the economy, the distinction is largley academic.
January 13, 2008 8:36 AM | Reply | Permalink
The recession around 1982 and then the ones in 1992 and 2001 all exacerbated the problem of income inequality--the rich benefitted in the recoveries while the other 85-90% didn't or fell further behind. Instead of paying people more, the financial wizards behind all this began to encourage credit to keep people spending. Then they created more shiny investment vehicles to separate rubes and greedy people and even a few who should have known better from their money. Now we are in a Minsky moment of excessive risk taking and debt, and the pendulum will have to swing back, smashing a great many people in the process. But power is so tied to money in our society/government that the bottom 85-90% will most probably just fall further behind.
This is a VERY unstable situation. We have multi-millionaires here in CA who would rather keep their money and import workers from India than truly support education and grow our own educated workforce.
We are a third-world country, but because so few Americans travel and still believe were No. 1! people don't realize what has happened.
January 12, 2008 10:40 AM | Reply | Permalink
Re: On the economic front much of our economic activity has shifted from material goods into financial services.
Not just financial services, but services in general. Which are not necessarily "bad" jobs since consider how much, say, doctors make.
Re: It is impossible to value financial products properly, as the current melt down shows.
Huh? The value of anything, including financial products and services, is what people are willing to pay for it.
Re: The number of jobs in manufacturing and agriculture continues to decline.
I'm not sure that's a problem. Agricultural jobs were always the bottom of the heap. Manufacturing paid well but the work sucked: boring, regimented, physically draining, and often enough dangerous and (even without actually accidents) bad for one's health. I don't think we should cry to see such jobs growing fewer. The problem of course is that we are not replacing them (at least for the people who lose them) with jobs that pay as well.
Re: The US is becoming a former empire, just like Spain, Holland, England and many others.
Prediction: the US will remain a Great Power for a long time to come. But that's "A" great power, not "THE" great power. One possible long-term future involves a United States of North America, including the US, Canada, Mexico, maybe some Caribbean states, and a Greenland with more less ice, more habitable land and available natural resources. (I am predicting, not advocating)
Re: The working classes get poorer.
Really? The English working class is actually poorer today than when Victoria reigned? (And it's even more of a stretch to say the Spanish are poorer now than in Philip II's heydey. As for the Dutch, they would probably laugh at the idea that they are worse off than their ancestors were back when Rembrandt was painting tulips).
Re: Russia, China and India will become major players over the next decades.
China and India are on the way up, no doubt about that. Russia is and will remain a great power-- but I don't see it being any more than that. The Soviet superpower days are gone for good.
January 12, 2008 12:30 PM | Reply | Permalink
Ironically, at Victoria's time, the main external indicators sperating her and the poor would have been living space, heat, and food. The queen did not have much in the way of useful doctoring, compared to now, and she couldn't hire a helicopter to get past traffic.
And we all are better off than our ancestors regarding things like shelter, food availability, and communication channels. If those reasonable indicators were sufficient, then why do the wealthy want more? Ask not why we should tax wealth, ask why wealth is sought, if it's not a big deal.
It is of course the competition that matters, not the absolute measure. And we approach the Victorian impossibilty of poor ever breaking out to midle-class status, much less wealth. So the result is fixed classes. No thanks.
January 12, 2008 2:26 PM | Reply | Permalink
Re: Ironically, at Victoria's time, the main external indicators sperating her and the poor would have been living space, heat, and food. The queen did not have much in the way of useful doctoring, compared to now, and she couldn't hire a helicopter to get past traffic.
She also much better clothing and furnishings, a superior education, all sorts of opportunities for entertainment and diversion not commonly available, far more personal security, more opportunities for travel and better means to do so, and people waiting on her hand and foot sparing her every possible sort of daily domestic drudgery of the sort even our poor are spared from today by machines. Had she needed surgery she would have had anesthesia and antisepsis, while the poor of her day probably could not have afforded those innovations.
Re: So the result is fixed classes. No thanks.
I wouldn't want fixed clases either. Yuck. But we're a long way from that. Rags to riches is and always has been more a fairy tale. But people do go up (and down) the class ladder though generally just by a step. The poor may become working class; the working class may ascend into the lower middle class. The upper middle class sorts may strike it rich and become The Millionaire Next Door. And some people also go down the tubes. The homeless panhandlers you see on the freeway exits were probably not born that way. The millionaire's grandson may end up as just a commercial pilot (real story involving a friend). What you don't find as much are people who make a major climb, say, from poor to upper middle class. There's still plenty of social mobiliy, but tne magnitude of it has declined, probably due more to population pressures than anything else. Europe with its falling birth rates gives its people a less cluttered ladder. If some new Black Death killed off a third of us you'd see social mobility go into overdrive.
January 12, 2008 8:31 PM | Reply | Permalink
What is the comparison to agraian England? The world is going through two simultaneous transistions in addition to whatever the current business cycle is doing.
Technology is replacing workers all across the world. Many factorys barely have humans on their floors. Ironically virtually the Marxist ideal.
The other is that coming out of WWII the U.S. economy was something like 62% of world GDP. With China, India, Brazil, Russia and other poor countries growing the world is reverting to a more normal balance.
Dealing with these two transistions has been non-existent in the Bush era and thus made particularly painful. But softening the blow or not, they are going to happen.
Daniel A. Greenbaum
January 13, 2008 6:50 AM | Reply | Permalink
It would be easier to follow the thread if you had attached your remarks to my comments directly. Extracting quotes without any context makes it hard for others to know what you are referring to.
I'll only comment on one of your "rebuttals": the value of financial instruments. Saying that something is "worth" what people are willing to pay for it is just rephrasing the definition.
I'm talking about something else, that the "value" of the instrument can't be predicted over time. When people make investments in regular types of things the risks can be estimated. For example, when buying a home it will always have a residual value as a residence, the risks (leaving aside disasters which can be covered by insurance) have to do with the fate of the neighborhood. In general this can be anticipated over a least a decade or so.
Similarly when investing in a firm that makes something, there is a residual value in the plant and equipment as well as the intellectual property of the brand and organization. The risks have to do with competition and innovation. Even common stock of such firms can be valued according to standard measures. The most common one is the expected future earnings.
None of these measures is available for latest generation of complex financial instruments. The value of Bear Stearns depends upon how many deals they can put together in the future. This volume is determined by investing fads. If firms decide that mergers are no longer fashionable their business dries up. The widgets still get made.
--- Policies not Politics
Daily Landscape
January 13, 2008 9:38 AM | Reply | Permalink
January 13, 2008 1:06 PM | Reply | Permalink
Re: I'm talking about something else, that the "value" of the instrument can't be predicted over time.
So what? That's true of a lot of things, certainly in the financial world. No one knows if a given stock will go up or down next week. And who can say what the US dollar will be worth in five years? There's an element of gambling and of risk in investing. If you want safe and certain stick to FDIC insured bank deposits.
Re: None of these measures is available for latest generation of complex financial instruments.
Nonsense. You can estimate the risks for them the same way you do anything else: by analyzing their performance over time. The math can be complicated, but it's doable. And of course you do have to allow for the possibility, as in all else, that some unforeseen calamity may make a hash of those estimates.
Re: The value of Bear Stearns depends upon how many deals they can put together in the future.
And the value of GM depends on how many cars it can sell in the future minus how much it has to pay to make them, including legacy costs. Same thing, exactly. You can no more know (with certainty) in advance how GM will be doing in five years than you can know how well Bear Stearns will be doing. Consumers are fickle at all levels. And yes, you can bet that cars will continue to be made (for at least the medium near-time future) but you can't know how many of them will be made by GM.
January 13, 2008 1:02 PM | Reply | Permalink
Buying stocks is not an "investment" it's a high risk activity. That it has been pushed forward as a good idea by Wall Street doesn't change this fact. Those who bought the latest generation of financial instruments thought they were buying something akin to traditional instruments, that's why it was so important that they get AAA ratings.
It is exactly that one can't tell how many cars GM will sell in the future that makes buying the stock a high risk activity. In fact the returns on the S&P 500 for this decade now lag behind keeping the money in government bonds for the same period.
If analyzing the risks on these new instruments was as straightforward as you imply then why has everyone gotten burned? I think you don't understand what has happened to financial markets over the past year. Since the picture is far from clear you might want to study the situation the last time that financial speculation got out of hand - 1929.
In hindsight everyone could see what was wrong. It's no different this time, the tricks changed but the underlying basis for the activity is the same - pricing financial instruments without any relationship to the worth of the underlying assets.
--- Policies not Politics
Daily Landscape
January 13, 2008 5:33 PM | Reply | Permalink
Re: Buying stocks is not an "investment" it's a high risk activity
It's both: investments generally involve risks.
MayI assume that you lost a lot of money on pets.com or something like that? You speak with the bitterness of personal disillusion.
Stock markets have been with us for a long while now, and they're going to remain with. The sky is NOT falling, but there is going to be stormy weather.
January 14, 2008 3:35 AM | Reply | Permalink
Not to get into my personal finances, but I've never lost a great deal of money in the stock market, my investments allowed me to retire early.
There is historical evidence that investments in a broad portfolio, especially in a tax deferred account, for 20-40 years will do better than bonds, but there have been times when this hasn't been true. During the 1970's and 80's the market was essentially flat. During the past eight years it hasn't done as well as bonds. On average people's investments are going to do average. Those who think they can beat the market are either foolish or lucky. This is not a way to plan for your retirement.
Stocks are high risk and denying it won't change this fact. Furthermore what the value of your portfolio is when you chose to retire is very variable. If the market has just dropped 30% you have, in effect, thrown away a third of the years you saved. Drops of this magnitude are not uncommon over a two or three year period.
--- Policies not Politics
Daily Landscape
January 14, 2008 9:21 AM | Reply | Permalink
Re: Stocks are high risk and denying it won't change this fact.
I never denied that stocks are risky. That's a strawman. All investments are risky, although with treasuries the risk approachs zero. I really don't think that there's a one-size-fits-all-all-the-time strategy for investing though. It depends very much on one's circustances, the times, and what the purpose of the investment is. Someone who can't afford to lose money should avoid high risk. Someone with some leeway to gamble a bit can indulge themselves. Likewise if the investment is for something vital be more careful with it than if it's just to make some money.
January 14, 2008 3:13 PM | Reply | Permalink
You can only suck so many tens and hundreds of billions of dollars out of the whole thing and give it to your pals before it starts to have a lasting and negative impact. Yaaaay, globalizationerererererer.......bzzzzzzzz.....
consolation prize, though, when the lights go out
in the US, the rest of the world's going to be
huddled in darkness, too, except maybe China...they've got enough coal to keep them going until 2757, or so...cat sandwich?
LOL
January 13, 2008 6:37 PM | Reply | Permalink
I'm just a development and regional hand, so I don't worry about predicting recessions ... but if the LEI are down again for December, that will make three months in a row. And they have been flirting with a three months in a row downturn all year ... two months down, one up, one down, one up.
One problem with stimulus programs is getting the money out promptly in projects that are also going to provide lasting benefits. However, thanks to the Bush's short-sided transport funding policy, we have a massive backlog of beneficial rail and other public transport projects that are competing for an absurdly small pool of money.
An immediate injection of money into that pool, on the basis of break ground this year or pass it on to the next in line, would ensure that stimulus gets out to the economy while the recession is still in progress ... and help increase the reach of the ensuing recovery down the income ladder, which is a key to shortening the lag between the end of the recession of GDP growth and the end of the recession of job growth.
January 13, 2008 10:37 PM | Reply | Permalink
Good idea, Bruce. To my thinking, that's the right type of target: ongoing projects, up and running, but in need of an infusion of resources. Good bang-for-the-stimulative-buck.
Maybe that's how Bush planned it...not!
January 14, 2008 5:30 AM | Reply | Permalink
You guys have no hearts!
If you really wanted to ease the pain of unemployment, you'd call for a new "birth-death" formula. Just ramp up estimated business births, cut estimated business deaths, and presto, everybody will be working!
January 14, 2008 5:58 AM | Reply | Permalink
There are those who will tell you that plan's been working so far...
January 14, 2008 7:21 AM | Reply | Permalink
Do not worry, my fellow Americans! No matter how bad things might get, none of us needs to fear that
we will become caught in the trap of welfare dependency (unless you're rich). The government has given us freedom from those demeaning benefits that sapped us of our initiative. We now have our independence. So just pull yourselves up by the bootstraps, work hard and play by all the rules (and all those other cliches applied to people who become poor).
Yes, I know, we've been waiting for this trickle-down-economics to reach us for the past quarter century, but cheer up, it's so close we can almost hear the trickling now!
February 27, 2008 6:59 PM | Reply | Permalink