The myth of the mysterious jobless recoveries.

Yesterday on PBS I heard experts speculating about why recent recoveries have seen disappointing job growth.  So I decided to take a look at the figures, and found that the entire concept of “jobless recoveries” is largely a myth.  I say largely, as a examination of Okun’s Law may be able to find a tiny morsel of truth in the idea, but I found no evidence of any significant mysteries.  Indeed no evidence of any jobless recoveries, mysterious or not.

Here are the data on the first 6 quarters of recovery from the last 4 recessions:

Period            NGDP growth rate    RGDP growth rate    Change in jobless rate

1982:4 – 84:2      11.0%                          7.7%                        – 3.4% (points)

1991:2 – 92:4        5.9%                          3.1%                          +0.8%

2001:3 – 03:1        3.8%                          1.8%                          +1.0%

2009:2 – 10:4        3.9%                          2.8%                          -0.1%

The change in the unemployment rate was for the first 18 months after the cyclical trough.  In the Reagan recovery, RGDP soared and unemployment fell sharply.  In 2002 RGDP growth was well below trend, and unemployment rose.  In 2009-10 RGDP grew at trend, and unemployment was stable.  No surprises there.  Only 1991-92 presents a bit of a puzzle, as RGDP grew at about trend, and unemployment rose 0.8%.  But that’s it.  Where’s the evidence of a recent trend toward jobless recoveries?  What I see isn’t jobless recoveries, but three consecutive recessions where the first 6 quarters saw no recovery at all (relative to trend.)  We fell into three deep holes, and started digging sideways. 

So yes, the last three recessions have been quite different, but the difference was that during the first 6 quarters of “recovery” there was no recovery at all.  And 1983 is not an outlier.  We can’t do 1980, because the entire recovery lasted much less than 6 quarters, but previous postwar recessions saw RGDP rise at 5% to 10% rates during the first 6 quarters of recovery.

The real question is why did RGDP rise so slowly during the three most recent recoveries.  If you haven’t guessed yet, you’re obviously new to my blog. 

There’s no jobless recovery, there’s a jobless lack of recovery, or more accurately a M*V-less lack of recovery.

I don’t want to suggest that this is always a bad thing.  The previous two recessions were embedded within the Great Moderation.  Perhaps by being relatively stingy during the recovery period the Fed allowed for expansions of greater duration.  But in this severe recession there is no excuse for such a stingy monetary policy.  A 3.9% NGDP growth rate isn’t even digging sideways; it’s digging sideways and slightly deeper. If it weren’t for a certain degree of wage flexibility, 3.9% NGDP growth would have led to even higher unemployment, as real growth would have been well below trend.  Instead, wage growth has slowed just enough to allow this sub-par NGDP growth to produce roughly average RGDP growth.  In real terms we are digging sideways. 

Of course the recent data are more upbeat, and if Fed forecasts are right we’ll finally get a recovery in 2011.  Not clear why they couldn’t have provided a bit more NGDP growth in 2010.

Paul Krugman has noted the anomalous recoveries from recent recessions, and discussed structural issues having to do with balance sheets, bubbles bursting, etc.  At some level he may be right, but I think it’s more useful to figure out why those factors led to slow NGDP growth.  Did they disrupt the usual relationship between changes in the fed funds target, and changes in NGDP?  I’d guess the answer is yes.  Perhaps inflation targeting (rather than level targeting) also plays a role.  Price level targeting leads to V-shaped recoveries and inflation targeting leads to L-shaped “recoveries.”


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41 Responses to “The myth of the mysterious jobless recoveries.”

  1. Gravatar of marcus nunes marcus nunes
    5. March 2011 at 13:21

    Scott
    This post compares the 1950´s with the “present”.
    I link the unemployment rate to the depth of the hole and the speed with which the economy “craweld up”. The present hole is deep and the economy is, as you say, crawling sideways.
    http://thefaintofheart.wordpress.com/2011/03/05/welcome-back-nairu/

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2011 at 13:33

    Scott wrote:
    “Perhaps inflation targeting (rather than level targeting) also plays a role. Price level targeting leads to V-shaped recoveries and inflation targeting leads to L-shaped “recoveries.”’

    I think this gets to the core of it. Before Greenspan we had swift recoveries. We had monetary policy implicitly governed by some form of the Taylor Rule during the Greenspan era which despite attaching some weight to output gaps is still “memoryless” from the standpoint of the price level. And I think I could form a cogent argument that there was a subtle shift towards straight inflation rate targeting under Bernanke that has made the situation, if anything, even worse (empirically this has shown up more in the depth of the recession than the recovery).

    In short, if you like jobless recoveries, then you ought to love inflation rate targeting. Just another reason to move to price level targeting, or better yet, to our favorite not-quite-batshit-insane economist’s borderline sociopathic obsession.

  3. Gravatar of marcus nunes marcus nunes
    5. March 2011 at 13:47

    Mark
    Greenspan was “unconsciously” doing NGDP level targeting! I always was amused by his coinage of the term “Appropriate monetary policy”. And it turned out “appropriate”. Inflation targeting at present is a restriction on getting the economy back on track. Europe is about to and maybe the US (if it caves in to the likes of Plosser, Lacker and others)to experience additional unpleasantness

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2011 at 14:16

    Marcus,
    Yes, I know you can make that argument, but I would suggest that (especially if one looks at the 1990 recession) the trend in NGDP changed slightly after each recession. This is symptomatic of Greenspan seemingly targeting rates and not levels, and the result was L shaped recoveries from each recession.

    Yes, I’m following Europe quite closely (of course). Check this out from the the ECB’s announcement on Thursday:

    “The primary objective of the ECB’s monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.”
    http://www.ecb.int/press/pressconf/2011/html/is110303.en.html

    This is headline inflation of course, which is projected to be as high as 2.6% this year. Core inflation for the Eurozone remains just 1.0%. (The lunatics!)

    The ECB announced that the policy instrument would remain unchanged at 1%, but Trichet made implied that rate hikes are probably coming at the next meeting. Bond markets are now pricing in 0.75 points of rate hikes this year, which would take the rate to 1.75% by the end of 2011. The euro closed just under 1.40 dollars on Friday. This is all very infuriating.

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    5. March 2011 at 14:46

    Deja vu, all over again. I remember pointing out to DeLong (back before he decided there was such a thing as losing one too many arguments) that the ‘jobless’ recovery after 2001 was obviously because the recession had been short and mild. Just as the 90-91 recession had been.

    The recovery from the deeper and prolonged 81-82 recession had been stronger because of Milton Friedman’s rubber band analogy. Those three recessions and recoveries are perfectly understandable. Not so this one. We should have had a vigorous ‘snap back’, but haven’t yet. Rounding up the usual suspect; it’s monetary policy.

  6. Gravatar of The Rage The Rage
    5. March 2011 at 18:39

    You could argue the “snapback” is beginning. Good evidence is mounting that November 10 was the true “trough” and December 10 was the true beginning of the expansion.

    But I think Europe may send everything back to hell again before more notable progress by 2012-13 can be made. Especially with those undercapped German banks.

  7. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. March 2011 at 19:12

    If one wants to know how disastrous the US employment situation is, try this.

    Record fiscal stimulus and record unemployment fail. Particularly longer term unemployment. Massive unemployment, huge surge in federal debt and the banks did not get punished: triple fail.

  8. Gravatar of 雇用なき回復という神話 by Scott Sumner   – 道草 雇用なき回復という神話 by Scott Sumner   – 道草
    5. March 2011 at 21:25

    [...] by Scott Sumner   // スコット・サムナーのブログから “The myth of the mysterious jobless recoveries“(5. March 2011)を翻訳紹介。 「横穴を掘る(digging [...]

  9. Gravatar of CA CA
    6. March 2011 at 00:37

    Scott: if you’ve already mentioned this somewhere on the blog then I apologize, but here’s a video on youtube of you talking about the Great Recession.

    http://www.youtube.com/watch?v=VP4IiKxNj8I

  10. Gravatar of johnleemk johnleemk
    6. March 2011 at 06:31

    The video is actually highlighted for some reason by this conference: http://www.warwickeconomicssummit.com/2011/downloads.cfm

    I’m not sure why this particular video is there, given they seem to have had a lot of far more prestigious speakers in the past!

  11. Gravatar of johnleemk johnleemk
    6. March 2011 at 06:32

    Actually on that page, they’re giving Scott billing ahead of the UK Prime Minister. Wow.

  12. Gravatar of Scott Sumner Scott Sumner
    6. March 2011 at 07:05

    Marcus, Yes, that’s why the 1982 recession is such a good benchmark, it was also deep.

    Mark, That’s a good point.

    Mark, If Eurozone core inflation was 2.6% and a oil price decline brought headline inflation temporarily down to 1%, would the ECB be cutting rates, or would they point to core inflation? My hunch is that they would not cut rates.

    Patrick, Yes, in a way I’m merely stating the obvious–I’m surprised so many people keep talking about a jobless recovery. If there are no jobs, there is no recovery.

    The Rage, I agree about the US, but am worried about Europe. Another Greek crisis like May 2010 could hurt the US.

    Lorenzo, Yes, that graph actually makes 2009 look much worse than 1982.

    CA and Johnleemk, Thanks, I produced that for the Warwick Economic Summit in the UK. I can’t bear to watch myself on film, so I’ve never seen it.

  13. Gravatar of tom tom
    6. March 2011 at 07:13

    The UE rate can change for two reasons.

    1. A person listed as UE can get a job.

    2. A person listed as UE can leave the labor force.

    The “jobless recoveries” are usually about the latter occurring at a higher rate. The decline in LFPR due to the recession in the mid 70s was reclaimed by 1978, the decline in the early 80s was reclaimed almost entirely by 1985, the early 90s recession by 1996. The 2000 boom had an LFPR peak of 64.6 that has not been equaled and the current LFPR is at 20+ year low.

    Long story short- the current UE rate “improvements” have been about individuals quitting the job market more than they have been about new job creation being > job losses.

  14. Gravatar of Scott Sumner Scott Sumner
    6. March 2011 at 07:30

    Tom, Good point, but am I correct that most of the mystery in the job/GDP comparison was in the contraction? Thus it’s normal for the US economy to experience about 2.8% RGDP growth and about 1% employment growth. In this recovery we’ve had RGDP rise at a 2.8% rate and employment growth of a bit under 1%. So we are perhaps a bit below normal in terms of employment growth, but you really wouldn’t expect many of the lost jobs to have been refilled with 2.8% growth. I think the bigger mystery (in terms of Okun’s law) is why we lost so many jobs in the contraction, and first couple months of “recovery”.

    As I said, I’m not saying there’s no mystery at all, rather I’m emphasizing there is no big mystery, because 2.8% growth is merely trend, and hence not a recovery, jobless or not.

    And I’d say the same about 1992, BTW. There is a bit of truth in the “jobless recovery” that year, but the much bigger story was slow RGDP growth.

  15. Gravatar of steve steve
    6. March 2011 at 08:21

    I would think that the 82-84 recovery would be a true outlier in this bunch because of where interest rates were at that time? Why can you ignore them?

    Steve

  16. Gravatar of Steve Roth Steve Roth
    6. March 2011 at 08:43

    I’m an occassional rather than assiduous reader of your blog, so please excuse me if you and/or others have already covered this.

    1. Your assertion here (para following the table) seems to be that RGDP growth causes job growth. I assume I’m missing an implicit (undoubtedly monetary) connection that you have undoubtedly made many times, but isn’t that sort of contrary to your NGDP belief system?

    2. I’d be curious to see the following long-term (three+ decade) correlations (could pull them myself, but if you already have…):

    NGDP % growth minus trend : employment % growth minus trend

    Ditto for RGDP

    In each case, looking at zero, one-, two-, three- and four-quarter lags (longer?)

    How consistent (and how strong) are those correlations? Are there lengthy periods when the correlations diverge significantly (like, pre- and post-late 70s)?

    Do they diverge significantly during economic booms/busts? If yes, has the pattern of those divergences changed in any systematic way over the post-WWII or -WWI periods?

    An aside: since the NBER has no formal algorithmic definition of a “recession” (more like a bunch of sages standing at the taffrail, holding up their collective thumbs, and squinting at the wake), I find it rather a fool’s errand to build analyses based on the somewhat arbitrary dates for when recessions “began” or “ended.” As you say, “If there are no jobs, there is no recovery.” So one is sort of pegging an analysis to rather abitrary semantics. It doesn’t make the analysis useless (because obviously the “ends” of recessions aren’t entirely arbitrary), but it puts it on shaky and shifting ground.

  17. Gravatar of ssumner ssumner
    6. March 2011 at 09:26

    steve, No, 1982 isn’t the outlier, it’s normal to have fast jobs recoveries. The 3 most recent recessions are the outliers.

    Steve Roth, I think we agree, but am not certain. Here was my point. People should not be asking “why the jobless recovery” they should be asking “why the anemic recovery, why is RGDP growing so slowing?” When they ask that question, they may start thinking about very slow NGDP growth as a causal factor.

    I agree the NBER dates are misleading and arbitrary.

  18. Gravatar of Bogdan Bogdan
    6. March 2011 at 09:55

    Off topic :When did the use of V, U, L, W (are there other possibilities?) shapes became so widespread? Who were the first to set the trend? The business economists or the journalists?

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2011 at 11:36

    Bogdan,
    That’s a very good question, deserving of a comprehensive answer.

    But first of all, you’ve left off some of the other popular shapes, such as the bathtub shaped, the triple U shaped, the square root shaped, the inverted square root shaped, the N shaped, the O shaped (in circles, or what Republicans like to call “the Obama shaped recovery”), and the “Mickey Mouse shaped” recovery (lots of loop de loops due to invalid and irrelevant economic data).

    There are also variants on these basic shapes. For example the L shaped recovery has variants such as the “lightning bolt shaped recovery” (courtesy of George Ulmer of the Online Investing Al Blog) and the “cursive L-shaped recovery” (I’m not sure who coined that, but think of Laverne’s sweater in “Laverne and Shirley”). The bathtub shaped recovery also has a much more pessimistic version known as the “Olympic-pool shaped recovery” (courtesy of Symantec CEO Enrique Salem). The O shaped recovery has a variant known as the “quadruple O-shaped recovery”. (This is the invention of David Levine, CEO of MB media, who says “the OOOO recovery could symbolize a recovery that happens as we transition to a society that legalizes and taxes marijuana and decriminalizes it during an economic recovery.”) There are also composites such as the “N-O shaped recovery” (up, down, up, then around and around, also known as “no recovery”).

    My impression is that describing shapes of recoveries has a long history with very uncertain origin. The current long list of shapes has been raised by a wide variety of sources including professors, CEOs, traders, investment advisers etc. But I seem to remember that the number of shape descriptions this recession really mushroomed (as in a cloud) after “Dr. Doom” (Nouriel Roubini) started waxing poetic about what we should expect next while making dramatic Rasputin-like hand gestures on TV.

    I’m still waiting for someone to raise the possibility of a hecatonicosachoronal shaped recovery but that would require us to visualize the recovery in four dimensions. :)

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. March 2011 at 12:09

    ‘The 2000 boom had an LFPR peak of 64.6 that has not been equaled…’

    That was the dot.com boom investment in IT in preparation for Y2K drawing retirees back into the labor force. People were allowed to bring their babies and/or pets to work. An aberration (devoutly to be wished perhaps) unlikely to be repeated.

  21. Gravatar of Benjamin Cole Benjamin Cole
    6. March 2011 at 12:34

    Yet another cogent commentary from Scott Sumner. Why are we suffocating our recovery? Have we become so scared of even 2 percent inflation we are willing to do a Japan?

    We must avoid the weak, vacillating nature of the Bank of Japan, and stay the course with an aggressive, American-style pro-growth monetary policy. Damn the torpedoes, Bernanke, full steam ahead.

  22. Gravatar of Russ Anderson Russ Anderson
    6. March 2011 at 12:53

    Scott wrote: “Of course the recent data are more upbeat, and if Fed forecasts are right we’ll finally get a recovery in 2011. Not clear why they couldn’t have provided a bit more NGDP growth in 2010.”

    Not clear? Did you miss the Fed’s Mission Accomplished moment? By the end of 2009 the economy was clearly starting to recover – the Oh-My-God-we’re-all-going-to-die moment had passed – so the Federal Reserve started to phase out their special operations. Look at the FOMC press release from Jan 27, 2010 (http://www.federalreserve.gov/newsevents/press/monetary/20100127a.htm). The only objecting vote not only wanted to wind down the special operations, he wanted the Fed to announce they were planning on raising the federal funds rate. Mission Accomplished!

    They could have “provided a bit more NGDP growth in 2010″ but did not think it was necessary. It wasn’t until September 2010 that they realized the economy was not recovering like they thought and started to talk about QE2, which they didn’t actually start until November. But you know that.

    Maybe you wrote this in a hurry and it slipped your mind, but I don’t think there is anything unclear about why the Fed didn’t provide for more NGDP in 2010 (before QE2).

    FWIW, Minneapolis Fed President Narayana Kocherlakota, for example, has repeatedly said he believes the high unemployment rate is primarily structural and not due to a lack of AD. (http://www.minneapolisfed.org/about/whoweare/pres_research.cfm) Kocherlakota did eventually support QE2 but added, “However, I also think there are good reasons to suspect that the ultimate effects of any amount of QE are likely to be relatively modest.” What’s not clear about that?

  23. Gravatar of Scott Sumner Scott Sumner
    6. March 2011 at 14:28

    Bogdan, I’m not sure when, I suppose it’s only human to see shapes in any graph line.

    Mark, You have an amazing memory.

    Patrick, I completely agree. I think this recession drove a lot of 58-64 year old boomers into retirement.

    Thanks Benjamin.

    Russ, That was my clumsy attempt at sarcasm. I completely agree with you.

  24. Gravatar of Luis H Arroyo Luis H Arroyo
    6. March 2011 at 15:36

    What about the leakage of imports? here I plot AD, NGDP, and BoP (with sign changed). BoP recorded the biggest deficit in the history (7,5%/GDP). Some of this leakage should have rest to employment.

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&fo=ve&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=Off&txtcolor=%23000000&ts=8&width=630&id=GDP,FSDP,BOPBCA&scale=Left,Left,Right&range=Custom,Custom,Custom&cosd=2001-01-01,2001-01-01,2001-01-01&coed=2010-10-01,2010-10-01,2010-07-01&line_color=%23006600,%230000FF,%23FF0000&link_values=false,false,false&line_style=Solid,Solid,Solid&mark_type=NONE,NONE,NONE&mw=4,4,4&lw=2,2,2&ost=-99999,-99999,-99999&oet=99999,99999,99999&mma=0,0,0&fml=a,a,-a&fq=Quarterly,Quarterly,Quarterly&fam=avg,avg,avg&fgst=lin,lin,lin&transformation=lin,lin,lin&vintage_date=2011-03-06,2011-03-06,2011-03-06&revision_date=2011-03-06,2011-03-06,2011-03-06

  25. Gravatar of The Little Man Who Wasn’t There The Little Man Who Wasn’t There
    6. March 2011 at 15:58

    [...] Scott Sumner has a divergent explanation for the “jobless recovery”—there isn’t a recovery at all: Where’s the evidence of a recent trend toward jobless recoveries? What I see isn’t jobless recoveries, but three consecutive recessions where the first 6 quarters saw no recovery at all (relative to trend.) We fell into three deep holes, and started digging sideways. [...]

  26. Gravatar of Steve Roth Steve Roth
    6. March 2011 at 16:34

    Scott, just to say that I don’t think I said anything to agree or disagree with. Just questions.

    Still curious to see if the causation suggested is evident from the correlations over long periods, sliced and analyzed various ways.

  27. Gravatar of Full Employment Hawk Full Employment Hawk
    6. March 2011 at 17:53

    “Of course the recent data are more upbeat, and if Fed forecasts are right we’ll finally get a recovery in 2011.”

    According to Politico:

    “Federal Reserve Chair Ben Bernanke said Wednesday that House GOP’s 2011 spending plan would likely cost “a couple hundred thousand jobs,” a number he called “not trivial.”

    This indicates that the Fed is not planning to offset (or only do a partial offset) for the contractionary fiscal effects of the spending cuts the Republicans are imposing, so that these spending cuts will slow NGDP growth.

    This may well keep us digging sideways.

    I agree that the get the unemployment rate down NGDP growth has to increase enough to get RGDP growth above the trend.

    Incidentally, what trend are you assuming? 3%

  28. Gravatar of Scott Sumner Scott Sumner
    7. March 2011 at 06:34

    Luis, I don’t think BOP deficits cause changes in NGDP.

    I am also pretty sure your 7.5% of GDP number is wrong, that would be way over a trillion.

    Steve Roth, OK, I may have misunderstood you. I do agree that NBER dates area arbitrary, and I also believe that jobs are strongly correlated with RGDP growth, but not perfectly correlated. So jobless recoveries are possible. A close look at the data would probably reveal some anomalies.

    Full Employment Hawk, First of all, I do not believe the Fed consciously offsets fiscal policy, I think they do it without realizing what they are doing (by targeting inflation.) Second, Bernanke is a Keynesian, so I wouldn’t expect him to agree with me. I don’t recall ever seeing another economist make my argument, although I don’t doubt a few have. In any case, it’s a very counter-intuitive argument, and not something Bernanke would express before Congress. He’s also saying a strong yuan would help the US (another conventional wisdom that I think is wrong, because the Fed offsets a strong yuan.)

    BTW, a “couple hundred thousand jobs” is just over 0.1% on the unemployment rate, which has fallen by 0.9% in the first three months of QE. Obviously every job is precious to the person who losses it, but it is trivial in a purely statistical sense.

    If I thought the budget cuts really would cost that many jobs, I’d oppose them. But I’m not convinced they’ll cost any jobs. They also will allow the government to do tax cuts, which create jobs.

    The trend RGDP growth has been just over 3%, but recently may have slipped into the high 2′s. My analysis holds roughly true for either a 3% or 2.8% trend.

  29. Gravatar of Luis H Arroyo Luis H Arroyo
    7. March 2011 at 11:47

    Soctt, Based on the data of Saint Louis FED, between 2003-2007, the FSDP (final sales to domestic purchasers)and NGDP grew more of 7,5% several quarters:
    GDP FSDP RGDP
    2003-07-01 9,3 8,4 6,9
    2005-01-01 8,0 6,6 4,1
    2005-07-01 7,4 8,6 3,1
    2006-01-01 8,6 8,2 5,4

    There was some excess of demand, I think. On the other hand, I think that external leakage has had some important effect: first, containing the internal price level, it endorse the Fed policy. Second, The international reserve that flew into US were necessary a byproduct of external deficit -been partly caused by the fixed echange rate of China and others (more than $ 2 trillion of Reserve only in China).
    I´m not saying that the burble was the fault of Fed. But that the Fed was misguided by some data that don´t let see well the reality, and that, in its turn, enlarged a lot the factors of the crtisis.

  30. Gravatar of Pity useless men | Freelance and Blogger Jobs World Pity useless men | Freelance and Blogger Jobs World
    7. March 2011 at 16:01

    [...] has been too tight, and this has steadily eroded the demand side of the equation? Scott Sumner nods in this direction. In a recent post he compared recent recoveries to the v-shaped employment comeback in the early [...]

  31. Gravatar of Doc Merlin Doc Merlin
    7. March 2011 at 16:26

    @Lorenzo:
    “If one wants to know how disastrous the US employment situation is, try this.

    Record fiscal stimulus and record unemployment fail. Particularly longer term unemployment. Massive unemployment, huge surge in federal debt and the banks did not get punished: triple fail.”

    If fiscal stimulus has a negative effect on the economy as I have been saying for a while, then this is exactly what we would expect.
    Here is some data:
    http://www.antolin-davies.com/conventionalwisdom/spend.pdf

  32. Gravatar of Alex Alex
    7. March 2011 at 17:55

    I think the author of the article failed to consider that in the 1980′s, the US had a strong middle class that actually had money to purchase things which created a stronger recovery. Now days, US consumers are over leveraged, buried in debt and upside down on their mortgage. The GOP policies to wipe out the middle class are only going to make recoveries harder, result in depressed wages and eventually we’ll become a 3rd world country. The reason we are have a “L” shaped recovery now is not because people are being “stingy” but because the US consumer can no longer be the worlds consumer of last resort and instead we are going through what I would call de-leveraging. When you have an economy where 70% of it is based on consumer spending recoveries are going to be hard when those very consumers can not afford to take on more debt/spend more.

  33. Gravatar of Scott Sumner Scott Sumner
    8. March 2011 at 08:59

    Luis, Quarterly growth rates are very unreliable, they jump all over the place.

    Alex, And how does this comment relate to my post?

  34. Gravatar of Pity useless men – Economics - Pity useless men - Economics -
    9. March 2011 at 02:44

    [...] has been too tight, and this has steadily eroded the demand side of the equation? Scott Sumner nods in this direction. In a recent post he compared recent recoveries to the v-shaped employment comeback in the early [...]

  35. Gravatar of OGT OGT
    9. March 2011 at 08:43

    Sumner- Should I take it that from this you disagree with David Beckworth’s analysis of Fed policy in thr 2002-2005 period, during which he claims that monetary policy was too loose? Beckworth attributes part of the housing crisis blame to this too loose policy.

    Beckworth claims that NGDP growth was above trend 2002-2006 (I believe he uses an alternate measure though Gross Domestic Purchases, maybe?). Your graph only goes to 2003, so perhaps you agree on the 2004-2006 period.

    I am interested to know what, if any, technical differences there are in your approaches. If monetary policy truly has such a narrow policy success path between financial debt crisis creation and subpar job creation, it seems like we have a problem (or two).

  36. Gravatar of sp6r=underrated sp6r=underrated
    9. March 2011 at 10:35

    Scott, I saw this comment on Yglesias’s board and I’m curious if you have a response.

    Using the numbers Scott reports, in the early 1980s, every 1% of real GDP growth reduced unemployment by 0.44 percentage points. In the early 1990s, every 1% of real GDP growth reduced unemployment by about 1/2 as much, or 0.26 percentage points. And currently, every 1% of real GDP growth has reduced unemployment by only .04 percentage points, fully a 10 fold decline since the early 1980s. According to Scott’s data, if since the 2nd quarter of 2009 the US had grown just as fast as it had in the early 1980s, the fall in unemployment would have been just 0.28%. The notion that all we’ve seen is slower growth is decisively falsified by the very evidence he presents for it.

  37. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. March 2011 at 10:49

    sp6r=underrated. (1) According to Scott’s data, in the early 90s there was no reduction in unemployment during the rGDP rise. (2) given a rising population, a certain amount of economic growth is needed for unemployment not to simply keep rising from population flows into the labour market (unless the discouragement effect is sufficiently strong to counteract it). Scott’s analysis essentially assumes that point, hence his concern about how far growth is from trend.

  38. Gravatar of ssumner ssumner
    16. March 2011 at 13:51

    OGT, Yes, I slightly disagree with David’s claim. In my view monetary policy was either about right, or slightly too loose during 2004-06. It partly depends on whether you use level targeting, and what your starting point is. So I don’t really disagree with the view that their is an argument that money should have been a bit easier. Where I disagree is that I don’t think monetary policy played a key role in the housing bubble. Even if NGDP growth was too high, it was only slightly too high–not enough to cause a major housing bubble. I blame a combination of bad regulation and poor decision-making in the private sector.

    sp6r, I have no idea where he got those numbers. What is his assumed trend rate of growth in RGDP? (I.e. the rate that leaves unemployment unchanged.)

    Lorenzo, That sounds right.

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