What Took You So Long?

–When you’re down so far, it takes longer to come up:  The picture clearly shows the role of the depth of the hole in the job market in the GR relative to milder downturns.  In fact, eyeballing slopes, you can see that the rate of job growth in this recovery is about the same as the last one.  When you’re filling holes at the same rate, it will take longer to fill a deeper hole.

–Policy mistakes:  See Krugman, but the aggressive turn to austerity (budget cuts in the face of weak demand), the failure to recognize unique inflation dynamics at the “zero-lower-bound” (including the need for negative real interest rates), and most importantly the refusal to continuing plying fiscal stimulus, are perhaps the best answers to the question of this post.

And depth of the hole is no excuse.  If anything, that was a reason to do more.  You wanted your policy makers to look at the figure below when jobs were at their trough in early 2010 and conclude: “we’re going to need to significantly beat the slope of the last recovery or else we risk not breaking new ground until…um…as late as May of 2014!”  And I can assure that some of your policy makers, or at least their economists, were saying something much like that at the time.

In this regard, political dysfunction is an important part of the answer to “why so long…”

–Unique factors regarding the housing bubble, the wealth effect, balance sheets, etc: One meme here is that busts that result from the collapse of finance are always more protracted than those that result from a supply shock, be that shock exogenous—a disruption in the supply of a key input like oil—or endogenous—the Fed slams on the monetary brakes to prevent overheating.

Meh…I don’t doubt for a second that the loss of trillions in wealth from the bursting of the housing bubble was a factor in the depth of the downturn.   We’re a 70% consumer-spending economy and that’s a huge downshift in the wealth effect.  Nor do I doubt that debt bubbles are more pernicious and long-lasting than mark-to-market equity bubbles.  Banks can’t play extend-and-pretend in the latter case, for example, and deleveraging, risk aversion, the “Minsky moment” (flip from under-pricing to over-pricing risk)—they’re all real factors that made the GR tougher to grow out of than many of its predecessors.

But—and this is my biggest punchline of the downturn, my “what-did-you-learn-Dorothy?” insight—every freakin’ one of these problems was known and was movable by better policy.  Mostly temporary fiscal stimulus to offset the demand contraction of the negative wealth effect, but also debt reduction (cramdowns, principle reduction) to clear out that channel as well.

–Trade deficits: The fact that we went into the downturn with large negative trade imbalances meant we went in with a major drag on domestic labor demand, well before the collapse (trade deficit/GDP in ’06 and ’07: -5.5% and -4.9%, historically very big numbers).  That means we jumped into a deep hole with a heavy anvil around our neck.

–Inequality: The expansion began in the second half of 2009, but the fact that what growth we’ve generated has gone mostly to the top has likely played a role, again through the consumer spending channel.

–Hysteresis: Or as I like to mellifluously describe it, “once you bend the trend, it’s hard to mend.”  See here for details, but once all the factors above were working to slow growth, cyclical problems from the recession became structural ones in the recovery.  This is most clearly seen in our depressed labor force participation rate, but the fact of large and persistent gaps in output, jobs, and wage growth this late in the expansion are equally visible forms of proof.

–Global interconnectedness: The fact that so many other economies weakened along similar time frames to our own also made it tougher to more quickly recover.  There was a period in there somewhere when practically every advanced economy was talking about export-led growth, the arithmetic of which doesn’t quite work (somebody’s got to import).

I’m sure there’s more but I’ve got other stuff to do.  I’ll add other entries as they bubble up.  And sure, it’s fun to make lists, but the point is to learn from our mistakes.  Or, at least that would be the point if we were capable of doing so.