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Hoisted from Archives: The Jobless Recovery (July 20, 2009) - Grasping Reality with Both Hands

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Grasping Reality with Both Hands The Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, RealityBased, and Even-Handed Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu.

Economics 210a Weblog Archives DeLong Hot on Google DeLong Hot on Google Blogsearch July 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, it seems likely to be 9.3 percent or higher—at least 1.5 percentage points higher than originally estimated.... [T]he next stretch of road bears all the marks of a jobless recovery. Back in the 1960s one of President Johnson's economic advisors, Brookings Institution economist Arthur Okun, established a rule of thumb quickly named "Okun's Law"... swings in unemployment will always be half or nearly half the magnitude of swings in GDP. Why? Four reasons: (a) businesses will tend to "hoard labor" in recessions, keeping useful workers around and on the payroll even when there is temporarily nothing for them to do; (b) businesses will cut back hours when unemployment rises, reducing output more than proportionately because total hours worked will fall by more than total bodies employed; (c) plant and equipment will run less efficiently when hours are artificially shortened; and (d) some workers who lose their jobs won't show up in the unemployment statistics, choosing instead to retire or drop out of the labor force.... According to Okun's Law, the unexpected extra 1.2 percent decline in real GDP in 2009 should have been accompanied by a 0.5 or 0.6 percentage-point rise in the unemployment rate. Instead, we experienced a 1.5 percentage point rise.... [E]vidence has been mounting that Okun's Law is broken—especially with regard to the retention of workers in a downturn. In 1993—two full years after the National Bureau of Economic Research said that the 1990–1991 recession had ended—the unemployment rate was still higher... than it had been at the recession's trough. We saw this same kind of "jobless recovery" after the recession of 2001. It wasn't until 55 months after

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Hoisted 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 been working before the contraction. Now in 2009... get ready for another jobless recovery.... 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 high interest 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 mid 1980s, 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 main thing that responds to monetary policy—has to rise above normal levels rather than recover from an interest-imposed slump. I'm guessing there is another set of factors at work. Manufacturing firms used to think that 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 key assets.... [F]irms believe that their remaining workers will forgive them if they fire large 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 real GDP... growth between the second and third quarters... the NBER Business Cycle Dating Committee... is most likely to call the end of this recession for June 2009.... Yes, that would mean the recession is over right now. One reason for that is the much-maligned stimulus package, which probably boosted the real GDP annual 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 summer of 2010.... Politically, the question "did the stimulus work?"... answered in the affirmative. Democratic members of Congress seeking reelection in 2010 will be able to point to real GDP growth and an official end to the recession in the second quarter of 2009. However, that is probably not the most relevant question to ask.... Barring much faster real GDP growth than is currently in the cards, we appear destined for another 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 answer is... it was too small. Brad DeLong on July 18, 2010 at 11:53 PM in Economics, Economics: Macro | Permalink Favorite

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TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f08003883401348587ce19970c Listed below are links to weblogs that reference Hoisted from Archives: The Jobless Recovery (July 20, 2009):

Comments Travis said... I'm guessing there is another set of factors at work. Manufacturing firms used to think that 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 key assets.... [F]irms believe that their remaining workers will forgive them if they fire large 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 growth in the business sector (averaging 6 percent per quarter over the last three quarters versus the long-run average of 2.6 percent). I suspect that much of this productivity growth is of the second, work-harder type. Many employers reacted to the downturn by aggressively cutting their workforces, reorganizing remaining workers, and cutting other costs. They have reacted to the upswing by holding employment at or near recession levels, seeking efficiencies in supply chains, investing in labor-saving automation, and generally tweaking their business models to operate more efficiently than before the recession. We've heard this story frequently in anecdotal accounts of our directors and business contacts across the Southeast. As long as efficiency and productivity gains can be achieved in this way, employers may remain hesitant to hire. Reply July 19, 2010 at 07:40 AM bakho said... On top of the financial crisis, the oil shock of 2008 collapsed auto manufacturing. In 2006, the US was making over 16 million units per year. This year, the final number may be below 10 million. Auto manufacturing ALWAYS drops in response to an oil shock. However, this time is somewhat different. Prior to 2008, automakers pursued a supply push strategy aimed at maintaining market share. That meant that BigAuto was selling some units at less than cost. BigAuto has shifted to demand pull. When sales drop by over 40 percent in an industry that has over 2 million workers, job loss and the ripple effect will be a big factor. The manufacturing sector throughout is undergoing the same level of mechanization that reduced employment in agriculture in the 1920s. Skilled artisan labor has been replaced by computer driven tools. This increases the productivity and changes the skill set. We are transitioning from a time when a large portion of our workforce was engaged in manufacturing to a downsized labor force. This is a huge structural change that needs a structural response. Even during economic expansions, the numbers of manufacturing workers have declined. Our politicians do not seem to recognize that the change is structural and that we need BigG to help with the transition. We have the labor capacity to manufacture new stuff or to offer more services. The BigG can do a lot to help overcome the barrier costs to manufacturing new stuff or building public infrastructure. http://delong.typepad.com/sdj/2010/07/hoisted-from-archives-the-jobless-recovery-july-20-2009.html

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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 workforce training organization. The fledgeling US electronics industry got a boost from military covering the costs of training. WWII also trained large numbers of people in warehouse and supply management, trucking, etc. etc. Post WWII, the GI Bill provided a large amount of funding for continued workforce training and expanded the number of jobs in the University sector including a lot of service jobs. Looking for housing to lead us out of the recession is worse than usual, because housing is overbuilt and the glut will take a while to work off. Reply July 19, 2010 at 08:11 AM bakho said... "But if there is a lesson for the US to learn from the Germans, or indeed from just about 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 technology infrastructure at the applied end of the R&D chain. The Fraunhofer Society, which is an umbrella group for about 40 research institutes, is intended to fill the gap between basic and company-based industrial research. While most of the research is driven by industry contracts, the infrastructure of the Fraunhofer Society is publicly funded. Germany is also one of the biggest promoters of basic research; with 20 percent of total world expenditures on basic science, it takes second place behind France (with 21 percent) and ahead of the US (with 16 percent) and Japan (with 12 percent). Given that the US is a much larger economy, $14.256 trillion versus $2.182 trillion, US underinvestment in basic scientific research should be painfully obvious. In addition to the basic research performed in the university system, the state also supports basic research through the Max-Planck Society, which is an umbrella organization for about 60 specialized research institutes focusing mainly on different areas of physics, biology, chemistry and medical research. About four-fifths of its budget comes from the federal and regional governments. Germany also boast a publicly financed vocational training programme that works with the private sector. Vocational education and training is a joint government-industry program, one of these public-private enterprises that are common outside the United States. The federal government and the L채nder(German states) share in the financing of vocational education in public vocational schools, with the federal government bearing a slightly higher share. Known as the Dual System and created in 1969, many economists point to Germany's vocational training programme as one of its competive advantages. Indeed, about 65 percent of the country's workforce is trained through the vocational education system. In the United States, industrial policy has been traditionally largely set by venture capital and investment banks but over the past two decades our financial sector has morphed into glorified casinos instead of performing their traditional role of picking winners. Bring up the idea of an industrial policy, you are likely to be met with epithets of being a Marxist. And the idea of education as a public good, thanks to Ronald Reagan and the Friedmanites, is an anathema. Let me remind you that there are those who not only want to disband the Department of Education but to destroy the public school system itself. And in case it's not obvious, Germany's fiscal prudence is not burdened by an Empire. Germany spends but 1.28 percent of GDP on its military whereas we spend 4.16 percent. If you want to talk about restoring sanity to our insane spending, let's start there." http://delong.typepad.com/sdj/2010/07/hoisted-from-archives-the-jobless-recovery-july-20-2009.html

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http://mydd.com/2010/7/18/germany-is-not-the-united-states Reply July 19, 2010 at 10:47 AM Comments on this post are closed.

Economics Is not a Morality Play

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New York Times (blog) - Sep 28, 2010 Brad DeLong catches someone wondering if I am actually advocating war as a solution to our problems. Against stupidity, the gods themselves … ... Related Articles » « Previous Next »

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g-in Failure

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The Jobless Recovery (July 20, 2009) - Grasping Reality with Both Hands